Short Selling is Integral to Stock Market

Short selling is an integral part of the markets for a number of reasons. In addition to creating liquidity to help make a market, short selling allows people to benefit from a stock price going down. In other words, it levels the playing field for those looking to make all types of investments.

Short sellers look at companies with a bit more of a critical eye than the average investor, and this can ultimately work to the benefit of those that are looking into these equities. Sometimes longs are blinded by euphoria and optimism and there’s no one to hold these companies feet to the fire. The skeptical lens that short sellers look at a company through often helps present a balanced look at companies, and even sometimes benefits executives that choose to take the advice of potential short sellers.

In addition, it has been short sellers who have often been the “canary in the coalmine” for different stocks, sometimes being the first to telegraph misdoing or fraud at companies. In the past, many short sellers have brought questionable information to the regulators that has led to companies and executives being brought to justice for fraud and crimes that flew “under the radar” as the companies went about business as usual.

When stocks are trading off, short sellers that are covering positions come in and help create a bottom for them. Conversely, when stocks sometimes have artificial run ups on news that doesn’t affect the fundamental outlay of the company’s future, short sellers can come in keep things in reality. Ultimately, this prevents someone from buying at extremely artificial prices and then taking a significant loss. Short sellers can almost be regarded as the “watchdogs” of the market.