Short selling

[battery chucka' one]

I have a friend who works with stocks and he says that short selling had a lot to do with this latest economic crisis (esp with the companies going belly up). He gave us a crash course in what the practice entails (in addition to saying that he hated it) and it sounds like fraud to me. Anywho, anybody here have any thoughts on this?

[Goober McTuber]

Read this article:

http://en.wikipedia.org/wiki/Short_(finance)

I agree with a lot of it.

[KC Scott]

I have a friend who works with stocks and he says that short selling had a lot to do with this latest economic crisis (esp with the companies going belly up). He gave us a crash course in what the practice entails (in addition to saying that he hated it) and it sounds like fraud to me. Anywho, anybody here have any thoughts on this?

Anybody who says shorting is fraud doesn't know what they are talking about. What he may have referred to is naked short selling, I'll get back to that later.

The basics of a short selling a stock are you "borrow" shares of a stock from a broker. The only shares that can be borrow are shares in Margin accounts (Leveraged shares). When these borrowed shares are sold short, they must be purchased back later. If they are bought below the price they were "sold short" the individual keeps the difference. If the shares go up, then he must pay the difference between what he sold them at and what he must buy them back for.

So why is shorting thought to be bad? Beacuse you are betting against a companies success.
Is that bad? No, not in my opinion.

Many companies that put out bogus and manipulative statements to cause their share prices to rise artificially. Shorting is a counterbalance to that. Mark Cuban made quite a bit of money shorting bogus companies. So have many others. It's a great bullshit repellent.

But most importantly, Short sellers, just like longs are putting money into the market. Remember, you must buy shares back that you short. That's money at work. Many stocks that have been short targets ended up with even higher returns when they were short targets. Some examples include Amazon.com, Apple and Google. All of those had large short interest beacuse certain groups didn't think they were worth what they traded for. They all went way up eventually, sparked by shorts covering their positions at higher prices.

What is illegal, and isn't regulated well enough is naked short selling. I said earlier that the only shares that could be "borrowed and sold short were shares held in margin accounts at brokerages. Naked short selling is when the amount of shares sold exceeds the amount of shares available to short. It creates and inbalance between supply (More shares than should be in play) and demand (more sellers than buyers). The SEC has said they were cracking down on this and yet they never really did.

There are Websites that track short interest on stocks - buyins.net gives great data on oversold stocks:
http://www.buyins.net/tools/short_list.php?dys=%3E12

If you can get in on a squeeze (buying an oversold stock with massive short interest) you could see very explosive gains.
By the same token, though, you'll never see GE or Mcrosoft on a list like this.

[Mister Bushice]

So why is shorting thought to be bad? Beacuse you are betting against a companies success.
Is that bad? No, not in my opinion.

Many companies that put out bogus and manipulative statements to cause their share prices to rise artificially. Shorting is a counterbalance to that. Mark Cuban made quite a bit of money shorting bogus companies. So have many others. It's a great bullshit repellent.

The companies don't suffer, though, the people buying the stocks expecting them to rise do.

It's really nothing much different than gambling using house money, hoping not to lose it and some of your own as well.

[KC Scott]

The companies don't suffer, though, the people buying the stocks expecting them to rise do.

There's a term called "Pumpers" - these are the companies or PR firms used to tout a particular stock. They put out misleading or sometimes outright bogus claims about the future prospects of their business. People who buy these stocks will lose money beacuse as the share price rise, the companies execs are selling shares. It's dishonest and often times criminal. Shorting is the markets way of counterbalancing this.

Put it this way - market forces decide if a stock goes higher. If it is truly worth it's share price that's a decision the market makes every day.

It's really nothing much different than gambling using house money, hoping not to lose it and some of your own as well.

I'm really unclear how you get this simile Will.

You can only "sell short" what ever is in the balance of your account + margin. Same as if you were buying long.

How is that house money?

[Trampis]

Rack Scott and his replys, especially the "Bullshit Repellent" blast.

Nice explanations Scott.

[Insurgent]

Short selling makes the market more efficient. If your friend was sincere when he blamed the economic crisis on short selling then he obviously suffers from acute mental retardation and probably needs institutionalization.