Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
My gut tells me that when stock is sold short it increases the number of shares held long. The person you borrow from is still long and the person you sell to is newly long. If a dividend is paid the company pays dividends on all shares and "short holders" pay to the long holder of the shares they sold. I've been told that selling short doesn't increase the number of shares held long but it's hard for me to see why not. Can you lend clarity to this?
Thanks, Minyan DKB
You are exactly correct in your main assumptions (there are mechanical nuances in borrowing stocks and paying dividends through broker dealers that affect dividend tax payments, but for our purposes here they are irrelevant).
When I borrow stock from a long holder and short it, it most certainly increases the amount of stock traded publicly. In other words, for every share I sell short someone purchases a new share. In this way you can add the short interest to the outstanding float to estimate the "tradeable shares outstanding.
The only reason a large short interest is "technically" bullish for some is that short sellers are somehow deemed more short term oriented with less capital so that they cover more readily when the trade goes against them. I don't really agree with this premise.
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