Traders who short sell stocks can provide a warning sign to investors that a share price may be overvalued, says Organic Financial Group.
The act of 'short selling' – selling shares one doesn't own in order to buy them back cheaper at a later date – has received attention recently due to the potential overvaluation of Australian shares, says Organic Financial Group director Gary Norden.
“Short sellers are typically very knowledgeable traders and can provide a warning sign to investors that a share price may be overvalued,” Mr Norden said.
“In an environment of overly bullish brokers and analysts, it is vital that investors have a source to identify potential overvaluation. Short sellers could be viewed as a 'canary in the coalmine'.
“If the short sellers are wrong then they will be forced to buy back their shares which will also help investors,” he said.
Mr Norden has little time for those who argue that short sellers drive shares to unrealistically low prices.
“Investors don't lose money by buying shares which are too cheap, they lose from buying shares which are too expensive. I don't see anyone criticising those who help push share prices too high!”
“In fact, on the really weak days for shares, the selling typically comes from investors and short sellers will often be buyers on the weakest days,” Mr Norden said.
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