What is short interest?
The number of shares of a certain company that have been sold short and that are still outstanding (i.e. they haven't been covered yet). This can be expressed as the total number of shares sold short or as a percentage of the float (the float is the number of shares that are available to be traded by the public).
For example, let's take Crocs Inc. (ticker: CROX). Crocs Inc. has 85.67 million shares outstanding and a float of 81.71 million shares. The total number of shares that were outstanding short positions (i.e. they have yet to be covered) were 8.59 million shares. This implies a short interest of 10.51% as a percentage of the float. This means that 10.51% of all tradeable shares are current outstanding short positions that will need to be covered at some point in the future.
For us as traders, the short interest is important because it is an expression of market sentiment with respect to a certain stock. If a large percentage of the float of a certain company is already sold short, this means that there are many investors and traders that have a negative outlook for the company's share price.
At the same time, as with everything in financial markets this could be looked at from a different perspective. From a contrarian's point of view, a large short interest means that at some point in the future, those shares will have to be bought back to cover short positions. It might then be wise to stay away from potentially shorting that stock, especially if the float for the company is small and the short interest is large as the slightest bit of positive news might send all current shorts scrambling to cover, resulting in a short squeeze with disastrous consequences for short sellers.