ShmoopTube

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finance a la shmoop what is short interest theory no this is not about

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goldfish attention spans or shmoop writer attention spans either for that matter[Goldfish in ocean appear]

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and yes that would be no this is not about goldfish attention spans but if we

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know this is not our you can get the idea

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all right short interest theory is yet another investing theory this one

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basically says Zig one other's zag or rather the theory involves the float or

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the trading totals of shares in a given company that is that if ten twenty maybe [Stock daily trading volume chart appears]

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thirty percent of the stocks daily trading volume is held short with

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investors betting the stock will go down well then it's going to gather your

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interests if you're a institutional investor following this thing let's

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think about this for a sec this means that if ten million shares trade a day

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and four million are held short then some interesting things might just

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happen let's think about this theory first this theory says that the stock [whatever.com stock price appears]

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will likely go the other direction of where it's held short ya up you know

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like the movie why would this be the case you got lots of people who are

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smart shorting the stock betting it's gonna go down betting there's big

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problems hmm okay so there's problem here when lots of smart people are

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seeing the same thing no the same thing doesn't usually happen let's say you

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have a stock at 40 bucks a share with a huge 35% short position on it and that [Stock with share price appears]

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short position can be calculated as a percent of the float meaning the shares

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that regularly trade every day or of the total shares outstanding why does it

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matter well in some stocks where you have a hundred million shares

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outstanding 60 million of those shares might be held by the founder and you

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know 15 or 20 of his cronies and a couple of board members who are gonna

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own it for decades they're never gonna sell so they don't trade in it so not a

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hundred million shares trade regularly it's more like only 40 million shares

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trade regularly so a thirty five percent short position on that company might

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only refer to the float of 40 million shares in which case something like in

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twelve thirteen million in change are short on it got it alright so in our [Investors appear]

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example here let's say investors probably shorted that stock that's now

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at 40 bucks they shorted it at 50 and some at 30 and some at 60 and some at 20

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right like it's a volatile stock and they all sold a short thinking was gonna [Investors with different share price appear]

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be worth eight bucks at some point so you look at a short position in a stock

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and it's likely that not all investors shorted it exactly the same price

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certainly not worth trading today at these forty bucks so now the stock does

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miss a quarter and it goes down three dollars on the news to 37 well there are

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probably a whole lot of investors who did short at 40 and are happy to make

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their quick three bucks buy the stock back and close out their short position

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with the brokerage they make $3 and move on all right well others who shorted at [Investor scratching head]

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20 only to see the stock double like wiping them out like they lose a lot of

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money when the stock goes up 20 bucks when they were at 20 betting it was

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going to 8 or whatever well they want to stop the pain so they just buy out their

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short position at 37 here taking $17 of pain in the process and moving on all

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right and that was pain like a lot of pain those seventeen dollars of loss [Man screams in pain]

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like 50 shades of a broker yeah where the safe word is neutralized and then

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there are still others who shorted the stock heroically at 60 bucks a share who

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are now happy to get off the million dollar ride and convert meaning they'll [Rollercoaster appears]

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buy back their stock at 37 dollars here in making 23 bucks a share in profit and

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move on well what does all this mean all this conversion of a short position to

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ending the short or unwinding it buying the stock long handing all the shares

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back to the brokerage and having no exposure to this stock anymore what does

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all this mean well with a ton of quote fuel unquote left in the ownership [Fuel gauge appears]

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position and likely with days and days of short position out there like days

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and days of trading like even if you unwound 5% of the total flowed every day [Calendar pages flick over]

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would take you days and days to fully unwind a short position until there was

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zero percent short on that stock eventually you have to convert those

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short positions to long positions or at least by long positions against them to

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neutralize your exposure to the short so the stock essentially has time on its

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side as odd as that sounds and brokerages love doing stuff like this

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because they charge the people who short the stock a fortune to rent the stock to

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short it's called the borrow and it's a nice profit

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Center for brokerages who trade in all that got it okay so times on their side [Clock ticking forward]

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because whichever way the stock moves it will make the load of investors nervous

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and they will likely start buying the shares long to close out their short

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positions and remember that when investors short a stock they have to pay

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this borrow on the interest as long as they're short that stock so even if they

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buy them and they're still short they have to then give both the long and the [Investors cash transfers to brokerage]

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short back to the brokerage to neutralize the position there is no good

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strategy to short and hold the stock for ten years unless you were at GE a decade

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ago maybe but even then the borrow would probably kill you all right moving on

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then there's always the specter of Google coming along and paying $60 a [Google HQ appear]

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share for our stock that wheedle down to 37 dollars a share and then you're

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really wiped out because if you shorted it at 20 and you never covered and

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Google pay sixty for it you've lost $40 a share on your short position and

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that's a problem so yeah that's the short interest Theory when there's lots

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of shares short on a stock it actually tends to go the other way I mean it goes

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up not down because there's so many short people nervous Nellie's out there [Girl biting her nails]

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who know they have to cover their short at some point and there's also a short

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attention span theory which is the theory that you stop watching this video [Woman whistling and walks away from computer]

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45 seconds ago didn't you yeah all right we knew it

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