What’s the purpose that benefits the whole of the economy? I don’t understand it’s purpose other than to bet on a losing stock. Is it purely for hoping a business will fail? Where is the benefit outside of the individual shorting? The idea of shorting a stock seems unmoral and unethical. Basically why is shorting even allowed to be a thing?
In: Economics
so, you are really asking – why are we allowed to short stocks……
its our money; why cant we bet that a company will fail? its almost the opposite of regular investing where we buy today in hopes the price rises in the future
short sellers keep money in circulation, which is a generally good thing for an economy.
You are allowed to do things even if they don’t “benefit the whole of the economy”.
Shorting stocks is allowed because no one has written and passed a law which would make shorting stocks illegal.
It allows for faster and better price discovery.. it is bad for the economy as a whole to have money tied up in failing companies so shorting allows negative information to effect stock price which makes the market more efficient.
You are allowed to transfer your stock to another person. You are allowed to sell stock, and you are allowed to buy stock.
If you own a stock, and I offer to give you $20 and a promise to return the stock in a week, you can loan me the stock. Then I can immediately sell it. And then a week later I can buy an equivalent number of shares and return them to you. You’re $20 richer, and I get to profit the difference between how expensive the stock was last week and how cheap it is today.
Which part of this transaction would you propose could/should be made illegal?
A lot of unmoral things are allowed, encouraged even when it’s about money. People doing this do it to make money, not to better the world even by a bit.
It’s primarily a self-interest, but you probably don’t go to work in the morning out of noble duty for the greater good either.
That said, shorts can provide a “service” to the market both by providing liquidity for the market and when they publish their reasoning *why* they think the company is failing.
If you’re an options trader and want to take the long bet that the stock will go up, you need another party taking the short bet. The shorts make the options chain function.
In the more traditional short sale scenario where the short seller has borrowed and sold a stock, they’re increasing the volume of shares in play on the market if someone actually is looking to buy.
And sometimes companies actually do lie or obfuscate their failures. They publish deep fried financials and lofty growth predictions that the short seller has looked into and sincerely doubts.
Some of the larger players in the short game will publish their own reports on the stocks they’re shorting, detailing their reasoning. If you’re planning to invest in a company and a short seller has recently taken a large position against them, you may want to know why.
There have been a few highly publicized cases lately where the shorts have been (at least temporarily) wrong, but usually companies with a lot of short interest really are in distress.
There is no “benefit to the economy.”
The benefit (assuming all goes well) arises between the person who owns the stock and the person who shorts it.
It’s more or less just gambling on the value of the shares. If you win, you get a big payday and the owner of the shares gets a cut of it.
Firstly, shorting a stock does not mean that you are betting a company will fail. Just that its price is overvalued.
Stock shorting allows a couple extra things. In the grand scheme of things, it allows for stocks to be more reasonably priced in ways other than regulation or competition. If the only way for someone to profit from a stock is for it to go up, then there will be little incentive for investors to accurately price the stock. In essence, the fact that someone can profit from a fall in stock means that a meticulous evaluation of the stocks price is incentivized.
The second thing is that shareholders can profit from stock shorting. The stock being shorted is not borrowed for free; interest is charged on it. Thus, even if the stock goes down, the stockholder that lent out shares receives the shares back plus some extra, which can help to insulate themselves from further losses.
Can shorting stocks be used in unethical ways? Yes. But that doesn’t make it an inherently less ethical method of investing.
Because capitalism doesn’t care for morality or ethics as it is not a system involving behavior, it is a system which cares about profit.
Shorting is a path to profit for a company that is going to fail. Going Long is a path to profit for a company that is projected to do well in the coming months. Options and Hedges are systems to help you mitigate losses by having counter balances and thresholds to get you out early or help offset those losses with some wins.
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