It’s an important way of gauging market sentiment and the potential volatility of a stock. Obviously, the more volatile a stock’s price is, the more cautious you should be. So, in this article, we’ll break down what does short float mean for traders and how can you use it for your strategy.
We’ll also explore short ratio vs short float as well as short interest vs short float. Knowing these differences allows you to make trading decisions based on how investors are betting for or against a stock.
What is a short float and why is it important?
Short float stock refers to the number of shares being shortened divided by the total number of shares outstanding. In other words, it’s the percentage of a company’s outstanding shares sold short by investors who are betting that the stock’s price will fall.
Understanding shorts as a percentage of float is important because it indicates investor sentiment toward a stock. How investors, in general feel about a stock’s importance actually plays a big part in its value. Sentiment can drive prices up or down depending on how traders, as a group, view the future of a company.
High short float stocks suggest that many investors believe the stock’s price will drop in the near future. A bearish market may be on the horizon, based on this evidence, but it might only be for this specific short float stock.
On the other end of the spectrum, a low short float indicates that there are fewer investors betting against the stock. It’s likely a bullish signal hinting at the stock price going up.
Short float vs short interest: What’s the difference?
Despite being related, there are some differences in the metrics of short float and short interest you should know.
To start, we’ll define how short selling works. Short selling involves borrowing shares of stock from a broker and then selling those shares on the market. The hope is to buy back the stocks at a lower price and pocket the difference as profit.
With the above context in mind, short interest refers to the total number of shares shorted by investors. Short interest’s typically expressed as a percentage of the total number of shares outstanding for a particular stock.
On the other hand, short float is the percentage of shares being shorted relative to the total shares outstanding but not yet covered or closed out by the investor. It, therefore, represents the number of shares that are currently held by short sellers and have not yet been bought back and returned to the broker.
The short float measures market sentiment in most cases. So, when wondering “what is a good short float percentage” you need to remember the following: High short float indicates that many investors are betting against the stock.
Investors look to the short float as a more useful measure. That’s because it normalizes differences in the total number of shares outstanding between companies.
Top Stocks With the Highest Short Float Percentage
Finding stocks with the biggest short float is important for context. You’ll see that stocks with high short float percentages are usually the ones widely discussed on social media. They’re also likely to have volatile price movements.
But, what is short float percentage worth paying attention to? Well, a short float percentage above 20% is considered high. If you see anything over 20%, there’s significant bearish sentiment toward the stock. A large number of investors are betting against its success.
Some examples of stocks with the highest short float percentage in the last few years include Ligand Pharmaceuticals (LGND), GameStop, and AMC Entertainment. These stocks have attracted a lot of attention from retail traders and have experienced significant price swings as a result.
How to Analyze Short Float When Trading Stocks
Since short float plays a significant role when determining market sentiment about a stock, you need to know how to analyze this information. We discuss these steps below.
- Identify the short interest: This information is freely available on financial news websites. You can also check with your brokerage firm.
- Calculate the short float percentage: It’s calculated by dividing the short interest by the total number of shares outstanding. As an example, if Company X has 20 million shares outstanding and the short interest is 2 million shares, the short float is 10%.
- Compare the short float to industry averages. This helps to determine if the short interest is unusually high or low and so, gives you an indication of how bullish or bearish investors are.
- Look for trends in the increase or decrease of short float. For example, if it has been increasing over time, it could indicate that investors are becoming more bearish on the company.
- Consider other factors to make an informed decision: Short float is just one metric. Also, look at other fundamental and technical indicators.
What is a good short float percentage for stocks?
When it comes to the ideal shorts as a percentage of float, there’s no one-size-fits-all answer. There are various factors to consider. But, generally speaking, you should pay attention to a short float percentage of 10% or higher. However, don’t concern yourself as much about a percentage under 5%.
When looking at this percentage float number, keep in mind the company’s industry and general market conditions. If a short float percentage is over 20% it means that investors are pessimistic about the company’s future performance.
But, at the same time, such a high short float percentage might also indicate that traders are hedging against market volatility or other factors.
A low short float percentage under 5% means investors are bullish on the company’s future performance. However, it might also mean there’s not much trading going on for the company’s stock, and there may not be much demand for the stock.