Why is short interest important for potential investors?

Short interest is important for potential investors because it provides insights into investor sentiment regarding a particular stock. When there is a high level of short interest in a stock, it indicates that many investors believe the stock's price will decline, reflecting a bearish sentiment. Conversely, low short interest suggests that fewer investors are betting against the stock and may reflect a more optimistic outlook.

Monitoring changes in short interest can also signal potential reversals. For example, if short interest decreases while share prices are rising, it might indicate that short sellers are covering their positions, which can lead to upward price momentum. Therefore, understanding short interest is critical for investors as it helps them gauge market sentiment and make informed decisions about buying or selling a stock.