By selling short, market participants may help others to identify overpriced stocks which are under the false impression of financial health. That represents an effective alert to avoid holding or increasing their positions in failing companies.

Short sellers ultimately cover their positions, restoring the market balance once the stock trades at a fair valuation. Short sellers are often the first line of defense against analysts’ bias.

While the conflicts of interest from investment banking keeps some analysts from giving completely unbiased research, work from short sellers is often regarded as being some of the most detailed and highest quality research in the market.

It has been said that short sellers actually prevent crashes because they provide a voice of reason during raging bull markets.