Shorting a stock is a risky bet that its price will go down. The position is contrary to the stock market's history of rising more than falling, so unsuccessful short sellers usually have short careers. Successful short sellers are typically seasoned, savvy investors who do their homework and place real money on the line. On Wall Street, they're considered "smart money." That's why it's worth your time to know the short interest on any stock you own or research.

Which software and services stocks are the short sellers currently betting against? I ran a screen to find stocks in the sector with short interest greater than 20% of the float -- the total number of shares publicly owned and available for trading -- and market caps of at least $200 million.

Company

Short Interest as a % of Float

Days to Cover Short

Travelzoo (Nasdaq: TZOO)

34%

1.4

Rosetta Stone (NYSE: RST)

32%

20.8

Ebix (Nasdaq: EBIX)

29%

7.6

Blackboard 

28%

14.3

Constant Contact

27%

14.2

VirnetX Holding (AMEX: VHC)

24%

4.5

Alliance Data Systems

23%

11.5

AsiaInfo-Linkage

23%

10.2

Echo Global Logistics

23%

26.8

VanceInfo Technologies (NYSE: VIT)

22%

5.3

Ancestry.com 

21%

5.8

QuinStreet (Nasdaq: QNST)

21%

12.5

RealD (NYSE: RLD)

21%

8.8

Sources: Capital IQ, a division of Standard & Poor's, and The Motley Fool.

"Days to cover short" is another way of gauging short interest. It compares the number of shares short with the average trading volume. The higher the number, the more trading days are needed for all the short sellers to get out of their positions, and the more risky the short bet.

As a basis for comparison, consider that short interest as a percentage of float is less than 1% for Microsoft and would require only 0.8 days to cover. Short interest on Oracle is also less than 1% of float and would require one day to cover.

Foolish takeaway
There's more to successful investing than watching short interest, and shorting a stock is a risky bet. Short sellers typically do their homework and attempt to place their positions only when they think a stock has more downside risk than upside opportunity. That's why it pays to see whether short interest is in line with your investment thesis. To help you monitor investment risks like this, The Motley Fool recently introduced a free My Watchlist feature. You can get up-to-date news and analysis by adding companies to your Watchlist now:

Fool contributor Cindy Johnson owns shares of Microsoft. The Motley Fool owns shares of Ebix, Oracle, Microsoft, and Rosetta Stone. Motley Fool newsletter services have recommended buying shares of Ebix, Rosetta Stone, and Microsoft and have recommended creating a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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