Why do we allow short selling?

[Tyler Durden]

In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to that third party. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as the seller will pay less to buy the assets than it received on selling them. The short seller will incur a loss if the price of the assets rises (as it will have to buy them at a higher price than it sold them), and there is no theoretical limit to the loss that can be incurred by a short seller.

http://en.wikipedia.org/wiki/Short_(finance)

I was reading a news article a few days ago (can't remember where anymore) which said one particular country's stock exchange does not allow short selling. It made me think, why is short selling allowed anyway? It's purpose seems to be to drive a share price down, yet driving share prices down seems to be a bad thing for markets?

So why do we allow it, and would we be better off if it wasn't allowed?

 

[banco]

Its defenders claim it facilitates price discovery.

 

[chrislp]

http://en.wikipedia.org/wiki/Short_(finance)

I was reading a news article a few days ago (can't remember where anymore) which said one particular country's stock exchange does not allow short selling. It made me think, why is short selling allowed anyway? It's purpose seems to be to drive a share price down, yet driving share prices down seems to be a bad thing for markets?

So why do we allow it, and would we be better off if it wasn't allowed?

You should ask this question here.



This question has been brought up a few times; a search won't do no harm.







Same applies to you Banco.

 

[explod]

It is supposed to help order in the market, ie. keep prices under control and provide hedging at times of uncertainty, ie. ballance a portfolio.

To me it stinks and is just another method used by the financial industry and insiders to cheat the ordinary investor trader.

Many of the huge collapses in the US in the last few years has found the big side of town on Wall Street on the short side with the US taxpayer bailouts going into the pockets of the rich.

A topic well worth the newbies doing a bit of research on. And I bet my comments draw flack from the usual traderonlycareaboutthemselves types.

 

[AzzaB80]

No flak, just points out the uneducated.

 

[wayneL]

No flak, just points out the uneducated.

Indeed

 

[explod]

No flak, just points out the uneducated.

Please,, lead us to the light ?

 

[wayneL]

Please,, lead us to the light ?

This has been done several times on this forum. You can lead a horse to water, but you can't make it drink.

 

[explod]

Indeed

So you agree that it is okay for a Broker to lease/lend out someone else's shares, without that someone knowing about it so that they can then help to bring the price down and then give back the shares to the somebody at the lower price.

Cummorn, give me some ethical reasons ?

 

[explod]

This has been done several times on this forum. You can lead a horse to water, but you can't make it drink.

I will accept that you may need to use dumb persons terms so for the benefit of us idiots can you please explain again, and not with some convoluted reference.

Surely if it is all lagit and straight forward then your task will be easy.

 

[Knobby22]

To me it stinks and is just another method used by the financial industry and insiders to cheat the ordinary investor trader.

Many of the huge collapses in the US in the last few years has found the big side of town on Wall Street on the short side with the US taxpayer bailouts going into the pockets of the rich.
.

That is called insider trading which is illegal and wrong.
It's not the short selling that is the problem but the insider trading.

I'm not that keen on naked short selling in large amounts and would like to limit it to small investors. The reason is that the small investors is up agaisnt superfast computers and may be tricked in selling (hitting a stop)and not be able to buy back in before the price rises again.

Don't know how it could be done practically though. Standard short selling where you borrow the shares is OK by me.

 

[skyQuake]

So you agree that it is okay for a Broker to lease/lend out someone else's shares, without that someone knowing about it so that they can then help to bring the price down and then give back the shares to the somebody at the lower price.

Cummorn, give me some ethical reasons ?

Only small time weasly brokers do that.

Real volume is from Prime Brokers/Custodians who first get a stock lending agreement from holders, and pay them interest/costs, then lend out the stock to the shorters.
Anything less is pretty much illegal.

And finally, what if I wanna bet something is going down? Do I have to cross the spread and buy a put option? and let the marketmakers delta hedge with shorts instead?

 

[Struzball]

You could argue going long is a problem too by driving up prices meaning a bigger crash down to fair value..

I wouldn't mind being able to short sell my house, I could keep living in it, I wouldn't have to pay interest on my loan until I buy it back at a lower price down the track, and I'd end up with a cash profit (assuming house prices fall of course). It would also help prospective buyers to know they aren't buying into an overinflated housing market.

If shares in XYZ are actually worth $40, allowing short selling won't suddenly make their real value $20. However if the shares are only worth $20 in the first place, and a ban on short selling keeps their value artificially at $40, how does that help anybody?

 

[prawn_86]

I wouldn't mind being able to short sell my house, I could keep living in it, I wouldn't have to pay interest on my loan until I buy it back at a lower price down the track, and I'd end up with a cash profit (assuming house prices fall of course). It would also help prospective buyers to know they aren't buying into an overinflated housing market.?

Slightly off topic but i know Macquarie was working on an ETF of each of the capitals for RE housing prices. So in theory you could do it with that.

Haven't heard anything new about if/when it will be able to be traded though

 

[explod]

No flak, just points out the uneducated.

What?

is it unneducated to point out that Wall Street cheats to take the money from the ordinary guy.

And being able to short with inside information does just that.

 

[AzzaB80]

Please,, lead us to the light ?

Learn how markets work would be a good start.

Maybe read a book or two, I'd start with this one:
http://www.amazon.com/Dont-Blame-Shorts-Sellers-Repeating/dp/0071636862

That is all I'm going to do for you. You work out the rest like I did.

 

[explod]

Learn how markets work would be a good start.

Maybe read a book or two, I'd start with this one:
http://www.amazon.com/Dont-Blame-Shorts-Sellers-Repeating/dp/0071636862

That is all I'm going to do for you. You work out the rest like I did.

So its not that easy huh.

I have been trading stocks since 1969 so do not suppose complete ignorance.

Short selling, though legal is unethical.

Let those who can state simply, a case otherwise, contradict me.

 

[AzzaB80]

So its not that easy huh.

I have been trading stocks since 1969 so do not suppose complete ignorance.

Short selling, though legal is unethical.

Let those who can state simply, a case otherwise, contradict me.

If you don't want to do the work why should I. I couldn't care less

 

[mazzatelli]

And finally, what if I wanna bet something is going down? Do I have to cross the spread and buy a put option? and let the marketmakers delta hedge with shorts instead?

hi explod, can you give us some of your insight regarding this question?

 

[LostMyShirt]

At the very least it adds liquidity to the marketplace. Considering it takes massive pressure on both sides of supply and demand to make a stock move, the added liquidity does not hurt.