Investor Education on short selling
Summary: http://trailfire.com/Just4fun/trailview/30836
Investopedia defines short selling as the selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
Naked short selling is the illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. However, some professional investors and hedge funds take advantage of loopholes in the rules to sell shares without making any attempt to borrow the stock.
This site gives investors an insight into short interest i.e. the total number of shares of a security that have been sold short by customers and securities firms. Short interest is typically expressed as a percentage. For example, 3% short interest means that 3% of the outstanding shares are held short.
Short interest ratio is a sentiment indicator that is derived by dividing the short interest by the average daily volume for a stock. Both fundamental and technical traders use this indicator to identify the prevailing sentiment the market has for a specific stock. It is also known as the "short ratio".
The short interest theory presumes that a large short interest is the predecessor of a rise in the price of a stock. The reasoning behind this is that the short positions must eventually be covered, which means that there will be more purchasers of the stock who in turn drive the price up.
