Myth #8: Short selling collapses share prices

Short sellers simply do not have the firepower to torpedo share prices. Short sellers need to borrow shares in order to sell short. This comes from shareholders who lend a fraction of their holdings to stock loan desks. Borrow availability usually averages less than 10% of the free float, in other words, the portion of shares available to public investors. This means that short sellers represent a fraction of the overall sell volume.

The BB guns of short sellers may have a punctual market impact, but the real damage is inflicted by the heavy artillery of institutional investors selling. This leads us to an interesting point about short selling. Making money on the short side is not about spotting stocks that could potentially go down. It is about riding the tail of institutional investors liquidating their positions.