: What is the economic benefit to short a stock?

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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

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Anonymous 0 Comments

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.

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