Ford Motor Company's Short Interest Rises 9.7%. Time to Panic?

By Markets Fool.com

There is a massive amount of noise for investors to sort through on a daily basis, whether you're perusing Yahoo!,Google Finance, orTheWall Street Journal, or simply following your favorite journalists and analysts via Twitter. Because of that, headlines have become increasingly important, and increasingly sensationalistic (I'm occasionally guilty of this myself). One headline that caught my eye recently, and surely grabbed many others' attention, highlighted a near-10% uptick in short interest for Ford Motor Co. stock. Essentially that means an increasing number of people think Ford's stock is going down in the near term, and no investor wants to hear that.

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However, let's put that increase in context to better understand whether or not this is a big deal.

Let's start from the top
First, let me define short interest and briefly explain its usefulness. Short-selling is the opposite of buying stocks; it's selling a security the investor does not own in the hope the price will fall and can be bought at a cheaper price, with the investor pocketing the difference. Essentially, short interest is the quantity of a company's shares that investors have sold short but have yet to officially purchase, also known as covering or closing out the position.

Short interest is essentially a gauge of market sentiment, as well as the changing of said sentiment, regarding whether a stock's price is likely to fall. High or rising short interest could be a red flag about a company, but investors have to do their homework to surround the numbers with necessary context.

Looking strictly at the numbers, Ford investors might seem to have cause for alarm. As of March 13, short interest on the company totaled 76.6 million shares, which was a 9.7% increase from Feb. 27. However, investors should never simply look at the total shares sold short or the percentage increase of short interest without understanding the short percentage of a company's float, or the number of outstanding shares minus restricted stock.

Ford currently has the 20th most shares sold short of all companies trading on the New York Stock Exchange -- sounds bad, right? Not really, because you have to consider that Ford also has one of the largest share counts outstanding on the NYSE as well. So, while Ford has 76.6 million shares sold short and that sounds like a lot, it only represents 2% of Ford's 4 billion share float, which means only a very small fraction of investors who currently have an open position in Ford stock believe the price is going down.

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But it's still a large percent increase, right?
While a near-10% jump in short interest in just two weeks might scream panic in the headlines, we also have to put that in perspective. If you told your friend that you just became rich because your net worth increased 400% overnight, because you made a brilliant move and just quadrupled every dollar you had, would that be true? Maybe so, but not if your net worth the night before totaled only two dollars and now you're still worth less than ten bucks. Sure, a 9.7% increase in short interest sounds like a big change for Ford, but it's really not because the original amount of short interest in terms of Ford's overall share float was very small.

Remember, despite a 9.7% increase, only 2% of investors with an open position in Ford are short-sellers, far from a worrisome percentage. In the age of Twitter when we scan through hundreds of 140-character messages, we often only take in the headline. The only lesson to learn from this is one I hope most readers of the Fool already know: Always read beyond the headline, ask more questions, and dig deeper to add context around the numbers.

The article Ford Motor Company's Short Interest Rises 9.7%. Time to Panic? originally appeared on Fool.com.

Daniel Miller owns shares of Ford. The Motley Fool recommends and owns shares of Ford, Google (A and C shares), Twitter, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.