How do "Shorts" affect a stock's price?

Question

I thought shorts drove down the price, but I read somewhere that if there is a lot of short interest in a stock, and the stock rises, then the shorts covering will rise the price higher.

Answer 1

When people enter a short position (borrow the stock and sell it), that can drive the stock price down (because the number of sellers has gone up). But if the price goes up later, those people with short positions may have to buy the stock back (to repay the shares they borrowed), which pushes the stock up further. That's called a "short squeeze".

Someone with a short position would buy back when the stock goes up either because they want to cut their losses, or the brokerage forced them buy back so that they (the brokerage) don't get stuck with the loss.

Answer 2

Shorting does drive down the prices when it is taking place. Covering pushes the prices higher. Stocks with high short interests would not go up until buying and covering occur. It is about supply/demand at a specific time.

Answer 3

"Shorting" is an essential part of our stock market to provide an orderly traded market. In the short term, it can cause a stock price to go up or down rather quickly. In the long run however, it has little to no effect, as supply and demand set the true price.