What's wrong with short selling??

Discussion in 'Economics' started by jueco2005, May 20, 2010.

  1. Most people I know who oppose short selling do so on the grounds that: "short selling only exists in the finance sector"

    Try to other assets except financial assets and becomes virtually impossible.

    thank you for sharing your wise comments
  2. The majority of the public in all countries around the world is long equities. Those who oppose it are trying to "protect" their positions against the misguided belief that short sellers cause equities to go down.

    Here's something to think about - would the same people who oppose short selling prefer that oil go up or down?
  3. zdreg


    all businesses that agree to sell products for future delivery are involved in short selling
    eg magazine subscriptions
    they agree to deliver you the magazine for 1year for a set price. that is your short position.

    the magazine needs to go out to buy the material and the services to produce it e.g. ink, paper, salaries for office staff etc.
    that is your long position.

    the difference between the two is your profit or loss.
  4. LeeD


    This is not true!

    Think of the nature of short-selling... Short-selling is selling an asset the seller doesn't own in expectation to aquire the asset at alter point. So, short-selling in essence is the same as selling a future or a forward. (Whether a 3rd party who lends the asset is involved is just a small technicality. In both cases the seller fixes the asset price now but delivers the asset at a future date.)

    We have established that short selling is practically the same as forward selling, that is selling when a price of an asset that will be delivered at a future date is fixed now. Forward sales take places all the. It's not only commodity derivatives but farmers fixing prices for the future produce sold to supermarkets, cotton farmers fixing cotton proce for the next season, clothes manufacturers agreeing in advance the price of items they sell to shops, landlords fixing the rent for the term of a tenancy... The list can continue on and on. All of it is effectively short sale.
  5. LeeD


    Oops, zdreg was first to post regarding equivalence of forward and short sale....
  6. Doesn't short selling prevent shares from going lower?

    Isn't that a good thing?

    So the sell off is just an excuse?

  7. Don't get this wrong here, im just confused, why is the market selling off to that reason?
  8. There is a bit of a difference though. If magazine goes out of business, they owe their customers their subscription fees back because they never delievered.

    If you have a stock that goes to zero, the short sellers never have to buy that stock back. They basically never deliver on what they sold. This is the problem I have with short sellers. Even when the stock gets halted and delisted, the short sellers never actually buy it back at "zero" The broker basically just deletes it out of their system.

    In other words, the short sellers created money out of thin air.
  9. LeeD


    1) Most short sellers buy the stock back. If you looks at the volume of shortselling, very few if any expect the company whose shares they sell to run into banklruptcy .

    2) Those who ran their short positions into bankruptcy, nationalisation etc are in fact quite unfortunate. They will be stuck with the nominal short position (that uses capital and cannot be unwound) for years till any complaints from shareholders/bondholders regarding how the bankruptcy/nationalisation was handled are settled.
    #10     May 20, 2010