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.
The law isn’t perfect. Not every single immoral things is illegal. There’s countless practices that are legal and unethical.
What benefit does it give to buy a stock off another trader in the normal way? You’re basically just betting the company will succeed and hoping to make money off it – which might be good for you, but your investment doesn’t necessarily do much for the country. The wider effect it has is to push the stock price up. This means that the company can raise money more easily, because people have confidence in it. If the company is a beneficial one, then helping the company raise money might be a good thing for society.
Shorting a stock is also a bet that you’re hoping to make money off. The wider effect is to push the stock price down and to reduce confidence in the company and make it harder for them to raise money. If the company is bad, that might also be good for society.
Let’s say I’ve start a company with the business plan of digging a hyperloop tunnel under the Atlantic. Is this a good idea that will result in something valuable, or a colossal waste of resources that will never get anywhere? Let’s say it’s a hopeless idea, but I’ve persuaded a bunch of gullible investors that I’m going to make trillions of dollars. This creates an enormous bubble that will, when the company inevitably fails, burst. Everyone who lent me money will never get it back. By shorting my stock, you can (a) profit from everyone else’s idiocy, and (b) reduce the size of the bubble, meaning that when my company fails, it will be a smaller disaster.
A lot of people hit the nail on the head with fundamental valuation tool description, but it also serves another important function.
There are huge companies that make their money by “making the market”. They provide bids and offers for a stock within a very tight range. They don’t always have stock on hand to sell to buyers, so the ability to short the stock allows them to keep markets liquid, even when they may not have shares on their book.
This also benefits the people lending their shares out to short-sellers, as they collect a yield from the person borrowing their shares.
>What’s the purpose that benefits the whole of the economy?
Who said that there needed to be a purpose for that?
There is no game designer creating this action so humanity can benefit.
Shorts are formed from simple contracts that people offer so they can make money off people screwing up.
And people engineer and engage in shorting because *they* think they’re going to make money.
Just a huge market of people trying to make money off each other.
It’s related to the concept of creative destruction.
The idea is that if a business is destined to fail, it is better that it fail quickly and free up employees and capital for more productive ventures.
Think of short sellers like vultures. It isn’t pleasant to watch, but without vultures and other scavengers, the natural would be littered with rotting carcasses.
There are abusive/predatory short sellers who spread false rumors about otherwise healthy companies to drive the price down artificially. This is illegal, but most short selling is ethical and helps the market be more efficient.
It’s really just a baloon credit with variable interest rate if you think about it.
Somebody borrows an asset, in case of a credit, that would be the principal in case of a short sale it is the security. This provides them with the liquidity to run a business or invest. They pay a recurring fee for a period of time, the CTB for the short or the interest for the credit. After the term is up, they repay the debt in full plus or minus the change to the value of the asset. In case of a credit, due to inflation, the principal _almost always_ looses value compared to the time of borrowing. Every credit is a short on the currency it’s taken out in with the interest _usually_ eating up all of the profit margin.
For the lenders side, it is an insurance. If you have an asset and you feel like it might loose value, you can lend it out and at least get the CTB for some time. It becomes a dividend on a falling stock. You are more or less paying someone a fee to limit your losses. This can be useful if you want to hold the stock during a volatile or bearish period rather than sell it at the peak.
Here’s a question for you to ponder.
Whenever stock changes hands there is a buyer and a seller.
Your post sort of implies buying stock is inherently virtuous or moral, they’re “endorsing” or “investing” in that company to do better. Cheering it on that it succeeds so they get more money.
But what about the seller? Aren’t they doing the exact opposite? Not endorsing the stock? Disinvesting? Saying it will fail so they’re getting out?
But there can be no buying without selling!
The point I’m trying to make is that there is NO inherently virtuous action in this market. All parties are completely self interested. In fact having high stock prices and feeding frenzy over a company’s stock isn’t always a good thing! rapid over inflated gains can affect a companies behavior for the worse!
1) Shorts have been more effective at discovering frauds than regulators have been. One might as well ask, “what is the social benefit of prosecutors, they just put people in jail”
2) Companies use land, machinery, and labor to produce products or services. That means society can’t use those resources for other things. Sometimes a company is using those things inefficiently, compared to their next best use. Without short sellers it would be *harder* to force poorly managed companies to give up those resources to better managed companies.
Why does shorting have to benefit the whole economy vs. being beneficial to an individual investor/individual firm? It’s not like it actively harms a company that people are shorting its stock.
It’s just a way for somebody to try and make money when they think a company/stock will decline in the future rather than only having ways to make money when stocks go up.
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