Aurora Cannabis (ACB) is one of the most closely watched cannabis players. Currently, the stock’s momentum is on a declining trend. Usually, when investors are pessimistic about a stock’s future, they sell their positions. However, there are investors that can make money without owning the stock. This process is known as shorting the stock.
How does shorting stock work?
Say Aurora Cannabis stock was trading at $10 Canadian dollars. An investor expects the stock to decline to $4 Canadian dollars in the next five months. Thus, by shorting, an investor could make $6 Canadian dollars before fees and taxes.
Now, the investor can go to its trading account (broker) and, if allowed, they can sell the stock without owning them. Essentially, the broker is lending shares to the investor to sell in the market and expects the investor to return them in the future. Since the investor has borrowed the shares from the broker and sold its shares in the market, known as short selling, they must buy back from the market at a later date and return the shares to the broker.
Sell high, buy low
A thumb rule of making money is to sell high and buy low. The thumb rule applies in this case as well. Say the investor sold short at $10 Canadian dollars and, after five months, the Aurora Cannabis stock is trading at $4 Canadian dollars. An investor can buy the shares from the market and return to the broker. Consequently, the investor pockets $6 Canadian dollars in the process.
While all this seems to be very administrative, today’s tech makes all this possible with the click of a button.
Aurora Cannabis’ short interest
The short interest is a metric that tells us the sentiment of investors towards a stock. If the short-interest ratio is relatively high compared to its past, it means investor sentiment on the stock is negative.
In March 2019, there was a lot of pessimism towards Aurora Cannabis stock with a short interest of 5.6%. This was considered bearish compared to the short-interest ratio in November short interest ratio of 1.8%. The stock price between March and November 2019 shrunk from $13.2 Canadian dollars to $4.8 Canadian dollars.
With a short interest ratio already at its low point, the market may be telling us that the worst for the stock is over. However, don’t take the low short interest of 1.8% to mean a bullish sentiment. We will wait until next week when the company releases its earnings. Perhaps, that’s what the short-sellers are doing. They are letting the earnings roll over and then will decide the direction of the stock.