Selling Short, Speculating, Gambling, Investing & Greed
“Selling Short is a natural part of Capitalism.”
When I heard this statement come through my TV speakers, I shouted back at the bobbing head on the screen. I couldn’t disagree more with that statement.
First, let me attempt to explain selling short. Let’s say someone has 1000 shares of iStock and the current price is $100 per share for a total value of $100,000. Another investor (or better stated – speculator), borrows those 1000 shares and promises to return them. The speculator takes those shares and sells them on the stock market and pockets $100,000. Five days later, the price drops to $75 per share and the speculator buys 1000 shares for $75,000. He takes the 1000 shares back to the original owner and keeps the $25,000 difference between his sale price and his purchase price.
For years now, I’ve had a rant that selling short is not healthy for our economy. Short Selling provides people the ability to gamble on the demise of a company. Short selling makes it beneficial to spread rumors about companies because people can capitalize on the downturn of a business. Proponents of short selling argue that there’s an equal chance of the price going up forcing the speculator to lose money in the process.
Gambling is the ability to wager on the outcome of an event. In my opinion, the greed that everyone speaks about as the demise of our economy can be traced back to the transformation of the stock market from an investment mechanism to a gambling mechanism.
No one (other than competitors) should benefit from the demise of a company.
What happened when the economic meltdown began at the end of September? The government made it illegal to sell short certain banking companies because they feared that selling short would drive the stocks (and the companies) into the ground.
Selling short should not be a part of our nation’s definition of capitalism. People should be able to invest in public and private companies. If they think a particular company is headed in the wrong direction, they can sell their stock (and buy their competitor’s stock). But selling short provides a platform of greed that corrupts our capitalistic society.