Its against the law to create money out of thin air and thats what short selling is doing. If I buy a stock and its sold to me by a short seller, I dont really have that stock yet even though my broker says I do. I mean..on paper i own the stock, but it wasnt issued by the company. If the stock pays dividends, the short seller has to pay me the dividends because the stock does, and all the while I am deceived into believing I have stock from the original company, but I dont(its from the short seller) If the money supply is 10 million dollars and someone adds $1.5 million to it, then isnt the money devalued by 15%. If there are 100 shares of stock outstanding and then their is short interest of 15%, didnt the stock just get devalued by market forces of 15%? If my stock price is $10 now, it would most likely be $11.50 without the short sellers devaluing the stock with their extra shares.
Well first it's not against the law to create money out of thin air, banks do it all the time when they loan out something like 10 times their asset base. But that's not what's happening with short selling. In your example, starting with 100 shares total. If I sell short 15 shares, there are now 115 shares held long, but 15 shares held short, for a net of 100 shares. I see nothing wrong at all with short selling, as long as the stock is borrowed as it is supposed to be. Naked short selling is another matter entirely.
In fact, creating money from thin air is excatly what the banking system is allowed and supposed to do. You put $100 on a bank account. The bank leaves a regulatory sum in reserve (say, for simplicity, 20%) and lands $80. The $80 is deposited in a bank which again lands $80-20% = 64% and so on following geometric progression. Out of $100 dollars issued by the Fed, there are $500 in the banking system. Interestingly, there are 2 interesting consequences of this system: 1) Despite inflation Fed didn't have to increase teh monetary base ($100 in the above example) for decades. 2) When banks stopped landing the monetryy mass shrank and that's why Fed was able to print (as opposed to borrow) a bit of money (in fact, increasing the monetary base by a factor of 2.5) without causing inflation/ In fact, a short seller borrows the stock from someone who owns it. So, in fact you own the stock and the guy who lent it doesn't. You both recieve dividends because the short seller pays dividends to the stock lander. A more interesting implication is many brokers (according to terms and conditions) are allowed to land stocks that belong to customers without asking customers' permission. Because the customers who land the stocks think they still have the stock they still think tehy are entitled to a vote in company decisions. What brokers quetly do is they quetly decrease the voting rights of every stock pro-rata. So, if a broker's customers own 100,000 shares buyt 50,000 of these have been lent by the broker, say, to a big bank or hedge fund, the broker knows that customers actually hold only the remaining 50,000 shares. So, every customer voting with 100 shares in fact receives only 50 votes instead of 100.
not true... anything that you pay upfront and are entitled to delivery is a short position... magazine subscriptions for example
You are talking like an investor who has found a great deal, a stock selling at a discount. Back up the truck and buy buy buy! If you are right, the stock price will go up, the shorts were wrong and will have to cover causing price to go up even more.
Good to know its not against the law to create money out of thin air. I think I will go do it today and buy myself a ferrari & a mansion(one in each state). Ok...lets say there is a stock trading at $10 per share and 100 shares outstanding. The bid/ask is 9.90/10.10. The short seller starts dumping his 15 shares and sells 1 share at the bid of 9.90. Now the bid/ask just dropped to 9.80/10 and he sells another share at the 9.70/9.90 range. By the time he has sold all his shares, the bid/ask is 8.40/8.60 with a Last of 8.50. Now sure if the stock starts to rise,they will have to buy back, but remember that the stock already dropped 15% from his original selling. So if the stock rises to say $11 per share and the short seller buys back, it forces the stock up to $12.50 per share. The problem is that the stock would have been 12.50 per share anyway if there were no short sellers. The stock never would have went down to $8.50 in the first place with the short sellers. I know some of you will say "well it breaks even in the end" but it doesnt. There is almost never a stock that has zero short interest, even if the short interest is only 2 or 3%, thats still 2 or 3% higher the stock would be without the shorts. In fact...if the shorts didnt short, they would have to actually BUY stocks then which would actually force the stocks to go higher by 15% (since their money would now be used for buying instead of selling) There would probably be alot more money then for people who start up companies that actually produce something instead of money being taken away by the short sellers. Shorts are rewarded too for their shorting. They get interest on the money they received from the sale of the stock. This just make more people want to sell than to buy which pushes stock prices down further.
"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." SMALL Technicality?! That is the WHOLE story....not small technicality.......... during 2008 melt down and due to the fact that NAKED short selling was tolerated some companies stocks were shorted more than the total number of shares outstanding for these companies. Meaning those GREAT speculators were able to NAKEDLY short 200 million shares of company (y) while the TOTAL number of shares in the market is ONLY 172 million shares. small technicality?! yeah....sure
What do you care if the stock of this 100-share oustanding company you describe goes to $8.50 or $12.50? You would only care if you owned one of those shares. So if you bought at $10, and it went down to $8.50, why would you not buy more? It was a good enough deal at $10 to get you to buy, now it's a screaming deal at 15% discount. If it's a good company, then the stock price will go up. No healthy company ever went bankrupt because of a bear run. A depressed stock price only hurts if a company must go to the capital markets to raise funds to survive. Healthy companies go to the debt market when they need cash, and pay a reasonable interest rate. Sick companies go to the debt market and can only get high interest rates, because everybody knows they are sick. So they sell more stock to raise cash, and get lousy prices because their stock price is low, and it's low because they are a lousy company.
and what about 1,000,000 shares outstanding and 1,500,000 shares sold by naked short sellers? Naked short selling must be forbidden everywhere. Borrow stocks if you want to short them. Just naked short selling is wrong