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
1) Makes markets more efficient by allowing people who do not own the stock itself to sell it, causing its price to go down. This makes accurate price discovery faster. Otherwise you’re waiting on holders of the asset to sell which can take longer (see recent housing markets after huge interest rate hikes where nobody is selling because they can’t afford their new mortgage rates)
2) Allows holders of the stock to earn yield on it by lending it out to shorters.
3) creates better markets with deeper liquidity. If you aren’t limiting liquidity on the ask side to people who own the stock already, you have a better order book with less price impact for buyers.
Edit: I’ll also ask, for all the people saying shorting is immoral: is shorting something that you KNOW to be in some way fraudulent immoral? For example, you are first to hear about a scandal where a manufacturing company uses slave labour to make all their products. You believe the company is finished and worthless once the news breaks to the wider world. By shorting that stock you depress its price. Is that immoral, or are you simply providing a service to the market by repricing that stock lower to reflect this news? It’s going to zero anyway, you’re simply stopping someone buying at a higher price and losing even more money than they would if you didn’t short. Efficiency.
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