Why are short sellers good?
A short selling position is opened by borrowing shares of a company and selling them. At a later date, the borrowed shares must be repurchased and returned. Short selling is a bet that the price will decrease. The risk on a short sale is theoretically unlimited because the price of an assets can climb to infinity.
While short sellers are controversial, they are critical for providing market efficiency, price discovery, risk management, and accountability of publicly traded companies.
Short sellers contribute to market efficiency by identifying overvalued stocks. They prevent bubbles that lead to market crashes.
Short sellers provide additional liquidity to the stock market which helps a stock’s price accurately reflect its true value.
Short selling is a necessary tool to manage risk in a portfolio. By taking short positions, investors can protect themselves from potential loss if a stock price falls.
Short sells can keep companies accountable by uncovering fraud and unethical behavior and exposing it to the market which would lead to a decline in the stock price.
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