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short sellers have to cover the stock, so in long run how does this effect the stock price?
well when someone shorts a stock, he has to cover the stock. so after some time he is going to buy it back. so how will it affect the stock price in long run. i agree initially the stock price may drop when the person sells, but after sometime he will have to buy them back, which will again raise the stock price.
so what i dont understand is why is eveybody blaming short sellers for stock crash?
The short answer is, short sellers do not affect the price in the long run. Like you said, they have to buy to cover, which when happens in mass can run up a price just like everyone deciding to go long. The blaming was just a distraction, in reality only a company with poor performance/fundamentals can push their stock down. If a company was doing fine, the buyers would come to buy up any temporary depression on the price.
One other thing, short sellers add liquidity to the market just like any other trader. With the greater amount of total money in the market, both long and short, this helps stabilize prices. The buy to cover after a steep price drop is sometimes the only bid/floor in a stock, so it is a bit ironic that shorts actually stabilize falling prices. One other point, the short sellers have a limited time frame to close their position, since they have to borrow the shares. If the original owner decides to sell, the short seller must buy to cover and return those shares, that is a risk the short seller takes.
In closing, the blaming of short sellers was just a convenient scapegoat, and they quickly lifted the ban once it was obvious the market was still falling. The ban did more harm than good, because many short sellers have pulled their money out of the market, and won't return if the rules change suddenly over night. Would you play in a casino if the dealer changes rules after you bet?
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