Why is Short Selling of Stocks Needed?

I've heard in various news stories that there was an abnormally high amount of short-selling (i.e., betting that stocks would go down) just before September 11 and backers of the terrorists probably benefited when the market retreated.


Given that another major (e.g. nuclear) terrorist act would almost certainly send the stock market into a deep decline, would restricting short selling be a good idea? Is short-selling a necessary method of allowable investment. Is it time to get rid of it and other similar investments?


Regards,


Rick

OK, seriously: Short-selling brings in additional liquidity to the markets - at least, that's the theory. It has become an integral part of sensible (and senseless) investing and I cannot see how American exchanges, at least, could do away with it. It can be regulated more, though, in realtion with the margin accounts, for instance.


As to the short-selling that allegedly took place just prior to the Black Tuesday attack, this should be investigated until the authorities get to the bottom of it. Since it appears that the perpetrators came from various Arab countries and that they were well financed, it wouldn't be surprising to discover that some "investors" or "financiers" made some "astute" moves in the bargain.


It is never a bad idea to follow the money!

While we're at it, let's get rid of CheckRaising in Poker as well.

Short-selling is just another way of trying to buy low and sell high. In short-selling, you're selling before buying instead of buying before selling. That's all it is, essentially.


In addition to speculation, short-selling provides a way for investors to hedge...let's say you believe a certain stock you own, say AT&T as a random example here, is a solid stock that has been hit lately and the market has been sinking somewhat as well. You don't want to sell your AT&T holdings, but you also don't want to suffer from some likely continued downward pressures. So you hold your AT&T and short a few other telecommunications stocks which you feel aren't as solid or strong, thus hedging your investment.


Sometimes certain stocks, or the market as a whole, is overvalued. Betting it will go down in these cases is just the flip side of betting it wil go up at other times. It's just being realistic sometimes. Short-selling doesn't cause stocks to go down in the long-term. Stocks and the market eventually arrive somewhere in the neighborhood of their approximate true value anyway, over time.


Short-sellng can be abused: if the terrorist organization

placed bets the airline stocks would sink, that is pretty obvious (and you can bet these creeps won't get paid now, either). But the fault here is not short-selling mechanism itself; it is that the terrorist organization had some very strong "inside information" (so to speak), and acted upon it.


I believe short-selling also does enable the markets to operate more efficiently, as do a number of other means of "placing bets." Also, buying and selling has never been considered "Un-American" (were you serious Cyrus?!?); rather, restrictions on buying and selling would be what most of us would probably consider "Un-American" (if anything).

when you short a stock it also means that at some point in the future you must buy that stock back to cover your position. short seling does not make the market go down. the only thing that make the stock market or any particular stock go down is the perception that the company will have smaller earnings in the future. nothing else.

And those damn wrong bettors at the craps table too.

I agree that it's all perceptions.


But there are many other perceptions, besides earnings, that make the market move.

But ray a massive terrorist act such as what we just experienced can immediately change perceptions and move the market way down. No single act can make the market go up (Alan Greenspan's pronouncements excepted). Do we need short selling for market liquidity or other purposes or would eliminating it be no big deal?


Regards,


Rick

I'll let Ray respond to your question, Rick, but I would like to add something here.


The market going down is not, by itself, necessarily an bad thing. If it goes down, it probably needs to go down, in order to better reflect its true value. If it is bloated or inflated beyond its inherent value and beyond its reasonable prospects for future earnings, then yes; people will get hurt when it goes down. But if it was inflated, it had to seek its true level sooner or later anyway.

Didn't I once meet you at raging bull? Engage? lol


Noguano is unbelievable.


that is all,


dannyboy :o)

name just one that moves the market then please

Preception that interest rates will go up or down

a simple announcement from a big company that its earnings are going to be much higher can move the market up, as well as down if the other way. earnings move the market.

short selling is needed to keep the markets functioning properly. to be very liquid the market needs lots of ways to get in and out, and short selling is one of them.

the rise and fall of interest rates change the value of companies, as they need to borrow. when rates change it affects their bottom line. what makes the market move from interest rate changes is the effect it will have on earnings.

As I've stated on the Stock Market Forum many times, when the economic risk goes up (increased threat to future earnings) prices have to come down. The increased threat alone will cause prices to decrease and this is perfectly rational behavior by investors.