Populist politicians, talentless company leaders, dreaming idealists are often blaming short sellers for the decline of one or other share, bond, and sometimes even for the problems of whole industries, countries or societies. In their opinions, short selling causes starvation and misery, blocks progress or scientific research, investing or development.
Whipping-boys
Sometimes politicians are banning short selling, for example in the case of bank shares, after the Lehman Brothers-crash. The nameless short sellers are much more easily to incriminate for a crisis, for example, than Mr. President “X” or Mr. “Y”, Chairman of the National Bank.
As I wrote some days ago about selling Tesla (and buying VIX shorts at the same time), some people were blaming me for similar acts. “Elon Musk started Tesla for the sake of accelerating the world to sustainable energy, not for the sake of making money” – wrote somebody. What? A CEO of a stock exchange-listed company, not interested in making money? Short it! Short it much more!
Good fairies
“Shorting Tesla (...) a terrible idea, and one that is acting against a company working tirelessly to change the world for the better” – wrote somebody. Nice, but we are happy today also without Betamax technology, VHS was enough for most people. Macintosh was better than IBM PC 30 years ago, but the better one almost disappeared.
I think other carmakers will also make good cars, like Audi, BMW, Chevrolet, Citroën, Fiat, Ford, Honda, Hyundai, Kia, Mercedes-Benz, Mitsubishi, Nissan, Peugeot, Renault, Volkswagen, and the list isn’t complete. (Longer list on Wikipedia.)
The two sides
But back to short selling in general. Short sellers are making two things: Selling, and buying back. Long buyers are making also two things: Buying, and selling again. Sooner or later. The difference is only: When? Which transaction comes first? Sellings are pushing the prices lower but buying, up. Every short seller becomes a buyer, and every buyer becomes a seller some day.
Short sellers are increasing the volume, the liquidity of trading on stock exchanges. And you know what? Short sellers are the best buyers, because sometimes, they have to buy, at any price. If the margin call leaves them no other option, they are obligated to do so. (See the Volkswagen shorting story of 2008...) If there are no short sellers today, there will be fewer buyers tomorrow.
Shorting and feeding
Short sellers are making a low stock price and the company won’t be able to invest, or produce more – are saying the foes of shorting. Production declines, people are getting poor because of short selling – some of them say. I told you short sellers will elevate the prices also, only later. But, what about commodities?
Are short sellers bad people shorting stocks, and good people shorting wheat, or rice? Because, at least what some people say, if shorting really lowers prices, shorting food should be a beneficial, charitable act. The poor will have lower prices, can buy more food, fewer people starving, should be great, or not?
Who is more important?
But, what happens with the poor farmers producing this food? What if these low prices ruin them? Especially in the underdeveloped countries, where no social protection system is present. The price of some commodities, like cocoa, sugar, coffee, soya, cotton, for example, can decide who lives or who dies.
Is high crude oil price good or bad? In this case, inflation surges, production costs of many companies also are increasing. Economic growth can be lower, some people can lose their jobs. But if the oil price falls, people in the oil industry can lose jobs. Fuel consumption surges, contamination increases. And development projects of renewable energy production, for example, or of electric cars can be slowed down or stopped.
It depends on
Then, is short selling good, or bad? It depends on. Sometimes good, sometimes bad, it depends on the person, group, circle of interest, product, situation, the point of view.
But the abolition of short selling would only cause less liquidity in the markets, more volatility, and may be fraudulent shorting services, products, illegal solutions. Or the rise of exotic investment places, foreign markets.
Disclaimer:
I am not a financial advisor and this content in this article is not a financial or investment advice. It is for informative purposes only, or simply to make you think, entertain, increase testosterone and adrenaline level. Consult your advisers before making any decision.
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(Cover photo: Pixabay.com)
Shorting is normal i don't know why most people are permabulls. On the long term the stock market goes up because corporations get more efficient and make more money. In the short term markets can go 3 directions: up, down or sideways. Shorting is a normal part of trading, it should be because it hedges the risk of your long positions.
I have two things to add:
When you talk about the fact that farmers and oil companies can lose their job, that's not even a argument because the futures market prevents that. Companies that rely heavily on the price of comodities can use futures to offset a decrease on the price of the commodities with the buyer of the product. In addiction, thanks to the futures markets the RETAIL price of rice, corn, chocolate and other commodities doesn't flutuate when you go to the supermarket buying them.
Also, when it comes to short selling stocks, I don't see any problem because retail short sellers entry a trade when there's a "price confirmation" which means the price is already falling and that's when big institutions increase their holdings on that specific company, so they have more liquidity and the spread is much lower.
I think that everyone benefits from short selling. Also, it's kinda crazy that Elon Musk focus so much on short sellers. If I were him, I wouldn't even care about that because the company has a good brand.
They can, but with limits, the longer settlements are mostly not very liquid. Maybe they can hedge 1-2 years.
But I also think that futures markets and hedging, shorting are natural, useful, positive things on capital markets.
Something else to take into consideration: When you buy shares of a company on a stock exchange, your money doesn't actually go to that company; it goes to whoever sold you those shares. The company got money from those shares when they first issued them. Likewise, when you short shares of a company, such as Tesla, you aren't actually taking money away from them. If the price of Tesla stock goes down, that negatively impacts people who hold Tesla stock (unless they see it as a buying opportunity), but ultimately, like any other business, Tesla will live & die not by its stock price, but by its ability to generate sales. And people who buy Tesla's cars do it because they buy into the vision, not because of Tesla's stock performance.
Capitalism is about money, the best vision or science is which one produces profits. More profit=higher stock price. But short sellers are picking vulnerable companies, where the business model lacks on something.
Right. The point I'm making is that since a company's ability to profit doesn't depend on the performance of its stock price (although, sooner or later, the stock price will be affected by the company's ability to profit), the activities of short-sellers don't directly affect a business's ability to be successful as a business. Hence, on that count as well, the idea that short-sellers hurt companies is misguided.
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