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For someone who is at the beginner level of financial trading knowledge, what does it mean for a particular stock to have high short interest? Does that mean th

For someone who is at the beginner level of financial trading knowledge, what does it mean for a particular stock to have high short interest? Does that mean there are so many people who are betting against AMD of late (meaning, that the market thinks the company is going to underperform in the near future)? Thanks in advance for your explanation!

silisili 5y ago
Short interest refers to number of shares (vs number of people), but you've got the idea. I hesitate to write a lot because there's always 'well, actually' clauses that sends you down a rabbit hole(or off a cliff), but simplified it's people selling shares they don't own, with an agreement to buy them later. The hope for the short seller is that the price will be cheaper in the future.
seoaeu 5y ago
No, there's an equal number of people* on the opposite side of those bets. If there was an imbalance between people thinking the stock is worth more than the current price and people believing the stock is worth less, then that would cause the price to move until it balanced out. *Technically an equal number of dollars
- mrweasel 5y ago
  Wasn’t that the problem with GameStop, the short sells had shorted more stocks than was actually in circulation?
  - vdjao 5y ago
    Identity A borrows a share from B. A sells the share to C in hopes of buying it back later at a lower price. C decides to loan their share to D. A: has one share loaned out B: owes A one share C: has one share loaned out D: owes C one share. Two shorted shares from one share
  - mason55 5y ago
    That did happen but the latest SEC report showed that it didn’t really have much impact on the price
  - seoaeu 5y ago
    The problem with GameStop was that many redditors thought there was more shorts than total stock available and that this would make it impossible for all of the short sellers to cover their position. In reality, a single unit of stock can be borrowed and sold short multiple times without really causing any problems
- ArtTimeInvestor 5y ago
  I think it depends on the structure of the deals. I can imagine a structure where shorts do signal an imbalance: A lends a share from B and promises to give it back in a year. A pays B a lending fee of $10. A sells the share to C for $100. Now C will make money if the price goes up by any amount. But for A to make money, the price needs to drop at least 10%.
  - seoaeu 5y ago
    In your example the bet is between A and B. If the price in a year is say $80 then yes A makes a $10 profit. But in that situation B loses the same amount: they started with $100 of stock, and a year later ended with $10 cash and $80 of stock. Conversely, B makes a profit if the stock goes down by anything less than 10%. This is a really good deal for B!
    - ArtTimeInvestor 5y ago
      In your example the bet is between A and B But that bet is not symmetrical. If B is of the opinion that the price will stay flat, it still makes sense for them to lend the share because they make a profit of $10. So we have two participants: A thinks the price will go down. B thinks the price will stay flat. Looks asymmetrical to me.
      - seoaeu 5y ago
        The bet is symmetric, but not around the current price: A thinks the price will be under $90 in one year B thinks the price will be over $90 in one year Of course that doesn't explain why they chose $90. If A really wasn't able to find anyone willing to bet that the price would be above $95 or $99 or whatever (despite C wanting to buy the stock for $100!), that would be a signal
        ArtTimeInvestor 5y ago
        that would be a signal That is the point. The statement I made which sparked our discussion was "I can imagine a structure where shorts do signal an imbalance".
Jorge1o1 5y ago
A stock can be sold short, meaning you receive cash from your broker now, and you promise to give them the share at some point in the future. This is pretty much a negative view on the stock because you’re hoping you can sell to open at $120 and buy to close at $100 and keep the difference for yourself. Short interest is the number of shares in all the short positions that have been opened but not closed yet, and it is a bearish indicator. It doesn’t necessarily mean that MANY people think the market is going to underperform though, it could actually be just a handful of hedge funds with massive positions. It also doesn’t have too much to do with the long term performance of a company. It’s probably better to interpret it as a view on the share price rather than on the long-term performance of the company. (interpreting any financial ratio or metric in isolation is tough) Another interesting implication of high short interest is this idea of “Days To Cover” which is short interest / average daily volume. In situations where days to cover is very high, shorts can find themselves unable to close their positions, even though the market is moving away from them (aka up). This leads to a short squeeze - famously with GME this year.
- kklisura 5y ago
  > A stock can be sold short, meaning you receive cash from your broker now, and you promise to give them the share at some point in the future. Just like OP, I'm also at the beginner level at financial trading, but I think you're explaining either options or margin with your first sentence, right? With shorting you borrow a stock (where you pay interest on it) and immediately sell it. When the price of stock falls, you then buy it and return it. Is this correct?
  - seangrogg 5y ago
    So your parent implied borrowing and selling the stock immediately to "receive cash from your broker now" and by doing so they are required to return the stock (unless the company goes bankrupt). In this way, you are both correct about what shorting a stock is. However, options are NOT like this. With options, the write side could receive a premium on their side of a contract for guaranteeing either to sell the shares at a specified price (a write-call) or guaranteeing to buy the shares at a specified price (a write-put). In either case, the person buying that contract can choose to either execute that contract or let it expire, meaning it could be the case that the writer (who receives a premium) may never have to act further (because the contract buyer never executes it, so the writer just pockets the full premium).
300bps 5y ago
“Float” is the number of shares that a company has sold and are available to trade. “Short Interest” is the number of shares that have been borrowed and sold into the market. So having high short interest just means one or more people are betting the share price of AMD will go down so that they can profit. Buying a stock (aka a long position) has a finite level of risk. If you buy 1 share for $100 your risk is limited to losing $100. Selling a stock short (aka a short position) has infinite risk. For example, someone that sold 1 share of Amazon short in November of 1997 for $5 has lost over $10,000 factoring in Amazon’s current stock price and the splits the stock has had over the years. When short interest is high the danger of a short squeeze is higher than usual. Picture what would happen if AMD stock price doubled. As everyone is buying the stock, short sellers would also be forced to buy the stock either to stop rampant losses or due to a margin call. This can make the price of a stock with high short interest rise dramatically. Good article on historic short squeezes: https://www.ig.com/en/trading-strategies/what-were-the-biggest-short-squeezes-in-history--210507 https://www.ig.com/en/trading-strategies/what-were-the-bigge...
bsder 5y ago
The general semiconductor shortage is likely to ripple upward to AMD even if AMD can produce everything without interruption. Processors rely on a motherboard. Those motherboards have a lot of popcorn semiconductors on them. A shortage in any one of those cheap chips means no motherboard sale which means no processor sale. Combine this with more people going back to in person (so less online) and it's likely that AMD is going to have a bit of volume hit.

silisili 5y ago

Short interest refers to number of shares (vs number of people), but you've got the idea. I hesitate to write a lot because there's always 'well, actually' clauses that sends you down a rabbit hole(or off a cliff), but simplified it's people selling shares they don't own, with an agreement to buy them later. The hope for the short seller is that the price will be cheaper in the future.

seoaeu 5y ago

No, there's an equal number of people* on the opposite side of those bets. If there was an imbalance between people thinking the stock is worth more than the current price and people believing the stock is worth less, then that would cause the price to move until it balanced out. *Technically an equal number of dollars

mrweasel 5y ago
Wasn’t that the problem with GameStop, the short sells had shorted more stocks than was actually in circulation?
- vdjao 5y ago
  Identity A borrows a share from B. A sells the share to C in hopes of buying it back later at a lower price. C decides to loan their share to D. A: has one share loaned out B: owes A one share C: has one share loaned out D: owes C one share. Two shorted shares from one share
- mason55 5y ago
  That did happen but the latest SEC report showed that it didn’t really have much impact on the price
- seoaeu 5y ago
  The problem with GameStop was that many redditors thought there was more shorts than total stock available and that this would make it impossible for all of the short sellers to cover their position. In reality, a single unit of stock can be borrowed and sold short multiple times without really causing any problems
ArtTimeInvestor 5y ago
I think it depends on the structure of the deals. I can imagine a structure where shorts do signal an imbalance: A lends a share from B and promises to give it back in a year. A pays B a lending fee of $10. A sells the share to C for $100. Now C will make money if the price goes up by any amount. But for A to make money, the price needs to drop at least 10%.
- seoaeu 5y ago
  In your example the bet is between A and B. If the price in a year is say $80 then yes A makes a $10 profit. But in that situation B loses the same amount: they started with $100 of stock, and a year later ended with $10 cash and $80 of stock. Conversely, B makes a profit if the stock goes down by anything less than 10%. This is a really good deal for B!
  - ArtTimeInvestor 5y ago
    In your example the bet is between A and B But that bet is not symmetrical. If B is of the opinion that the price will stay flat, it still makes sense for them to lend the share because they make a profit of $10. So we have two participants: A thinks the price will go down. B thinks the price will stay flat. Looks asymmetrical to me.
    - seoaeu 5y ago
      The bet is symmetric, but not around the current price: A thinks the price will be under $90 in one year B thinks the price will be over $90 in one year Of course that doesn't explain why they chose $90. If A really wasn't able to find anyone willing to bet that the price would be above $95 or $99 or whatever (despite C wanting to buy the stock for $100!), that would be a signal
      - ArtTimeInvestor 5y ago
        that would be a signal That is the point. The statement I made which sparked our discussion was "I can imagine a structure where shorts do signal an imbalance".

Jorge1o1 5y ago

A stock can be sold short, meaning you receive cash from your broker now, and you promise to give them the share at some point in the future. This is pretty much a negative view on the stock because you’re hoping you can sell to open at $120 and buy to close at $100 and keep the difference for yourself. Short interest is the number of shares in all the short positions that have been opened but not closed yet, and it is a bearish indicator. It doesn’t necessarily mean that MANY people think the market is going to underperform though, it could actually be just a handful of hedge funds with massive positions. It also doesn’t have too much to do with the long term performance of a company. It’s probably better to interpret it as a view on the share price rather than on the long-term performance of the company. (interpreting any financial ratio or metric in isolation is tough) Another interesting implication of high short interest is this idea of “Days To Cover” which is short interest / average daily volume. In situations where days to cover is very high, shorts can find themselves unable to close their positions, even though the market is moving away from them (aka up). This leads to a short squeeze - famously with GME this year.

kklisura 5y ago
> A stock can be sold short, meaning you receive cash from your broker now, and you promise to give them the share at some point in the future. Just like OP, I'm also at the beginner level at financial trading, but I think you're explaining either options or margin with your first sentence, right? With shorting you borrow a stock (where you pay interest on it) and immediately sell it. When the price of stock falls, you then buy it and return it. Is this correct?
- seangrogg 5y ago
  So your parent implied borrowing and selling the stock immediately to "receive cash from your broker now" and by doing so they are required to return the stock (unless the company goes bankrupt). In this way, you are both correct about what shorting a stock is. However, options are NOT like this. With options, the write side could receive a premium on their side of a contract for guaranteeing either to sell the shares at a specified price (a write-call) or guaranteeing to buy the shares at a specified price (a write-put). In either case, the person buying that contract can choose to either execute that contract or let it expire, meaning it could be the case that the writer (who receives a premium) may never have to act further (because the contract buyer never executes it, so the writer just pockets the full premium).

300bps 5y ago

“Float” is the number of shares that a company has sold and are available to trade. “Short Interest” is the number of shares that have been borrowed and sold into the market. So having high short interest just means one or more people are betting the share price of AMD will go down so that they can profit. Buying a stock (aka a long position) has a finite level of risk. If you buy 1 share for $100 your risk is limited to losing $100. Selling a stock short (aka a short position) has infinite risk. For example, someone that sold 1 share of Amazon short in November of 1997 for $5 has lost over $10,000 factoring in Amazon’s current stock price and the splits the stock has had over the years. When short interest is high the danger of a short squeeze is higher than usual. Picture what would happen if AMD stock price doubled. As everyone is buying the stock, short sellers would also be forced to buy the stock either to stop rampant losses or due to a margin call. This can make the price of a stock with high short interest rise dramatically. Good article on historic short squeezes: https://www.ig.com/en/trading-strategies/what-were-the-biggest-short-squeezes-in-history--210507 https://www.ig.com/en/trading-strategies/what-were-the-bigge...

bsder 5y ago

The general semiconductor shortage is likely to ripple upward to AMD even if AMD can produce everything without interruption. Processors rely on a motherboard. Those motherboards have a lot of popcorn semiconductors on them. A shortage in any one of those cheap chips means no motherboard sale which means no processor sale. Combine this with more people going back to in person (so less online) and it's likely that AMD is going to have a bit of volume hit.