May 5, 2009
I would simply like to mention a positive related to short selling, one that is rarely mentioned.
There are times when markets, and individual stocks comprising the markets, gap down very sharply and abruptly owing to such things as bad corporate news or national/world catastrophic events. Net worth, in such cases, hasn't moved from one asset to another... it has literally evaporated. It ceases to exist.
A hypothetical stock with no short interest trading at $100 that opens on bad news at $50 has lost half its value. On the other hand, if the same stock had a short interest equal to its long interest, and the stock opens at half its former value, the loss to the long positions is exactly equal to the gain made by the short position.
The great contribution of the shorts? The homes and autos the longs could've bought to support our economy, instead of literally evaporating, can now be made up by the shorts. The economy suffers much less in the aggregate as this sort of balance eliminates these gaps.
Yes, though, to reasonable controls on short selling and the elimination of naked short selling. But, a no vote regarding the development of too stringent rules.
John B. Reid, CFP®