October 11, 2008
Short selling has the effect of increasing the float infinitely.
Say the float on COMPANY ABC is 1,000 shares with 1 investors holding 1000 shares. Now short#1 borrows those 1000 shares and sells to Buyer#1. Short#2 borrows from Buyer#1 and sells to buyer#2 and so on. Pretty soon you can have 10 buyers holding 10,000 shares i.e. the shares have been diluted 10 times.
Say market cap of ABC is $10,000. With 1000 shares outstanding that turns out to be $10 per share market cap. But thanks to the shorts, we now have 10,000 shares outstanding. So the market cap is now $1 per share.
The original owner of stocks is essentially screwed and so are all the other 10 buyers.
Mind it this is the scenario when legal shorting is done. Of course naked shorting makes it still much worse.
PLEASE END ALL SHORTING FOR 90 DAYS ON ALL SECURITIES.
Thank you for listening.