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Financial Theory Videos 199 videos

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Finance: What is Short Interest Theory? 3 Views


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Description:

What is short interest theory? Watch this not-so-short video to find out.

Language:
English Language

Transcript

00:00

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

00:08

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

00:12

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

00:18

know this is not our you can get the idea

00:21

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

00:24

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

00:30

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

00:35

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

00:41

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

00:46

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

00:50

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

00:55

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

01:00

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

01:04

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

01:10

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

01:13

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

01:17

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

01:22

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

01:26

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

01:31

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

01:35

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

01:39

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

01:42

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

01:47

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

01:50

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

01:54

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

01:59

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

02:03

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

02:07

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

02:11

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

02:15

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

02:21

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

02:24

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

02:27

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

02:32

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

02:35

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

02:40

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

02:44

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

02:48

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

02:52

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

02:57

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

03:00

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

03:04

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

03:11

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

03:14

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

03:19

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

03:23

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

03:28

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

03:33

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

03:37

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

03:41

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

03:45

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

03:50

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

03:54

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

03:59

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

04:02

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

04:07

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

04:11

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

04:16

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

04:20

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

04:24

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

04:26

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

04:31

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

04:35

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

04:40

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

04:44

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

04:49

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

04:52

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

04:56

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

05:01

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

05:04

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

05:08

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

05:12

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

05:16

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

05:20

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

05:24

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

05:29

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

05:33

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

05:37

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

05:41

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

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