What is short float — and how can you use it to make smarter trades?
It has to do with short interest, or the number of short sellers in a stock. And you can use it to help you plan trades.
I’ve been saying for years that short sellers are the new promoters. Some of the hottest stocks spike big as a result of short squeezes. If you follow the rules and learn to ride the momentum, you can find a lot of opportunities.
Of course, it’s not that simple. But it’s worth knowing how to find a stock’s short float and what it can mean for price action.
Let’s get to it!
Table of Contents
What Is the Short Float?
The term “short float” tells you how many shares of the float short sellers are borrowing.
A company has shares outstanding and a float.
Shares outstanding is the term for all the shares that exist. Institutions, long-term investors, and insiders hold some of those shares. The shares held by insiders are often restricted shares.
The float is the number of shares available for trading. It’s the part of the shares outstanding that retail investors can trade.
The short float is an estimate of the shares traders have borrowed to sell short.
It’s an estimate because short float reports only come out twice a month.
Why Is Short Float Important?
It’s a good thing to know how many shares are short in a stock.
The short float can give you a gauge of the sentiment toward the stock. It can hint at whether the market outlook is bullish or bearish.
If the short float’s high, it could mean that a lot of people are betting against the stock. If it’s low, it could be that people think it’s going to go higher.
Sometimes there’s too much short interest on a stock. Shorts can be overaggressive. If overall sentiment changes rapidly, the stock squeezes shorts.
A short squeeze occurs when short sellers trigger a rise in price on a heavily shorted stock. It’s a rapid increase in the price of a stock due to a lack of supply and an excess of demand for the stock as short sellers cover (liquidate) their positions. In order to close out their short positions, the sellers are forced to buy to cover, creating heavy demand.
When demand exceeds supply, the price has to rise. If there are more people wanting to buy than there are selling, the price goes up.
When you get a lot of short sellers all trying to get out, combined with momentum buyers, the price can rise FAST. Panicking shorts scramble over each other to get out. The price can go parabolic.
There are safe ways to short sell stocks! If you’ve read my book, “An American Hedge Fund,” you know that I made my second million short selling promoted stocks.*
*Note: success as a trader requires dedication and effort. Most traders — roughly 90% — lose money. My results are not typical. Do your due diligence and never risk more than you can afford to lose.
If done well, short selling can be lucrative. I tend to avoid it these days because it’s not a pattern my students can replicate with ease. Now I prefer dip buying. And high short interest can also help this pattern.
What Part of a Company’s Float Can Be Shorted?
In theory, a company’s whole float can be short. You could have 100% short interest.
But it’s rare for a short float to be more than half of the float. Even seeing 40% short interest is a rare occurrence.
Remember that a shorted share is a borrowed share. You have to borrow shares from your broker to short.
If 100% of the float was short, that would mean that everyone who owned shares was loaning out every one of their shares.
It’s possible. Anything can happen in the market! It’s fun to think about a 100% short ratio. But it’s beyond unlikely.
Short Ratio vs. Short Float
Short interest ratio, or short ratio, is a percentage.
You take the number of shares short and divide that by the float. Turn that into a percentage.
Let’s say there are 100 shares shorted on a stock that has 1,000 shares in the float.
Divide 100 by 1,000 and get one-tenth. So, in our hypothetical example, the short interest ratio (or short ratio) would be 10%.
Short float is expressed as a number. It will be like hundreds of thousands or even millions. That doesn’t tell you as much as the short float ratio.
You can do the same process with shares outstanding and get an idea of the short interest on the company as a whole.
Short interest ratio can be more helpful because it gives you the relative information. Knowing how many shares are short isn’t good enough. If you don’t know how much it is in relation to the available shares, it can be deceptively small or large.
You don’t have to be good at math, though! If you know where to look, you can find that the math has already been done for you…
How Do I Find a Short Float?
Any reputable financial website should have short float data.
If you have a good broker, they should also have that information available for you.
And StocksToTrade can show you key statistics, including the short interest ratio and the number of shares short in the prior month.
I use StocksToTrade every day. It’s an all-in-one platform that allows you to do all your research in one place. It’s the best tool I could ask for. You could even build a custom short float screener.
If you’re not sure, they have a 14-day trial for only $7. Check it out. Invest in yourself!
(Quick disclaimer: I helped design and develop StocksToTrade and am an investor in it.)
There’s something to keep in mind. The NYSE and the Nasdaq only update their short float data twice a month. That means unless they put out data that day or the day before, your information will be a rough estimate at best.
Most financial websites include the date of the most recent update, so you know how fresh your data is.
What Is a Good Float Percentage?
In trading, you can’t think in black-and-white terms. Good or bad doesn’t apply here.
You have to think about what will work with your strategy.
Say you’re playing a breakout and the short float data show there’s a lot of short sellers in the play. You could get a short squeeze.
On the other hand, if there’s a lot of selling pressure, a breakout might get stuffed. Buyers can get scared away and the stock price can get crushed.
A high short float ratio could also make the shares hard to borrow. Sometimes you want to sell short, but you can’t find the shares. Think about supply and demand.
If the short interest ratio is high, that means a lot of people are borrowing the stock. There’s demand to borrow shares. Brokers can take advantage of the demand and get away with charging higher commissions for borrowing.
There’s way more to options. For trading purposes, especially short selling than I can explain in one blog post. If you want, you can go down the rabbit hole of articles I’ve written on it. Let me get you started with a quick how-to guide and 10 things you should know about short selling.
I also have a DVD called “ShortStocking.” It’s only six hours long and has all the short selling information you need.
What Is a High Short Float?
Everything’s relative. That’s why it’s important to know the difference between the short float and the short interest ratio.
If the short float is 100 shares on a stock with 10,000 shares in the float, that’s very low. But if the stock only has 1,000 shares in its float, that’s a different story.
Take a look at the short interest ratio. It’s expressed as a percent.
In the first example — where the short float is 100 and there are 10,000 shares in the float — that’s 1%. In the second example, the same number of shares in the smaller float is 10%.
When you’re playing blue chips, 10% is high and 20% is extreme. In penny stocks, I’ve seen short interest ratios around 40%. It’s uncommon, but it happens.
The higher the short float relative to the float, the higher the ratio. You can’t determine what makes a high short float on its own.
If a company has a billion shares in the float, it could have 10 million shares short. That sounds like a lot, but it’s only 1%.
As the short float gets higher, the price rises and it’s harder to borrow. It used to be a lot harder to find shares to short. Today I have some homework for you…
Find out if your broker has shares available for the three top percent gainers. If so, find out how much they cost to borrow. Compare the short interest ratio and the prices of the borrows.
How Can I Benefit From the Short Float Information?
Knowing market sentiment is imperative to good trading.
If you know the short interest on a stock, you can look for breakouts. Those breakouts can lead to short squeezes if the short interest is high enough.
My favorite pattern right now is the morning panic dip buy. Shorts who are covering help push the price up after a big dip.
If short sellers sold as the price fell, they have to cover to take profits. When the stock starts to bounce after the dip, shorts and dip buyers buy and push the price up.
The more information you have, the better. That’s why my team and I created StocksToTrade.
I used to spend hours going to different websites. And that was just to find the top percent gainers. Then I’d have to go to dozens more to gather information.
Now it’s all on StocksToTrade.
Trading Challenge
Have you ever dreamed of living the laptop lifestyle?
My top students and I are living proof that it can be done. But it didn’t happen overnight, and our results are far from typical. We have the benefit of years of hard work and dedication.
I think investing in your future is the best investment you could ever make. If you have the right attitude and you’re willing to work hard, apply for my Trading Challenge.
I have over 1,000 video lessons on breakouts and short squeezes alone. If you’re accepted to the Challenge, you’ll have access to every one of my video lessons.
You’ll also have access to years of archived webinars featuring my top students.
Conclusion
Short float gives you an idea of sentiment toward a stock. Combined with price action and market conditions, it can help you plan your trade.
Is there high short interest in a stock that’s breaking out? You could be looking at a potential short squeeze.
Is the stock about to break major support? It could be setting up for a dip buy.
Are you looking to short? A high short interest ratio could mean it’s hard to borrow shares.
Short float ratio isn’t one of my primary indicators, but I take it into account when I’m considering a trade.
The data is only fresh twice a month, but if you’re paying attention, you can still take advantage of it. Even if the data’s a week old, you can get an idea of how people feel about the stock.
A high short interest ratio can lead to short squeezes and stronger bounces.
“High” is a relative term … You have to consider short float in relation to the float and the shares outstanding. That information is easily summarized in the short interest ratio.
There are plenty of tools available to help you find information. That information will help you be better prepared!
What’s your favorite pattern? How could it benefit from an abundance of short sellers? Leave a comment below!
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