Shorting Stocks

What would the price of investments be if the only stocks being traded were ones actually in existence? If you consider the mathematics of stock shorting, it enables a speculator to sell stock he or she doesn't actually own. Yes, the stock sold is technical a real stock since the share has to be borrowed and delivered, however, the borrowed stock takes on a double identity, one share being held in an investment account and the same share being sold on a "temporary" basis to another investor.

Ultimately, all shares shorted have to be bought and I suppose those who short stocks argue this balances things out. Maybe it does, but the allowance of short selling adds a lot of volatility to the stock market that otherwise wouldn't exist. Traders love this, and the question that has to be asked is whether the stock market is designed for the Traders or as a place for companies to raise capital by selling stakes in their company.

Lets consider short selling for a second. If a significant number of people feel that a company is overvalued, or possibly simply notice that based on the number of shares being traded, more shares on the sell side could start a price drop, then they will short the shares. The shares being shorted add supply without adding any demand. Now, you hear short sellers say they help find weak companies and expose them. Maybe, but if the company is that weak, maybe the owners of the stock should be the ones selling it. Also, remember that after the shorts drive the price down they buy the stock back at a reduced price and often artificially cause a rebound. It is certainly possible that the stock had weak fundamentals, but there are plenty of examples where despite any fundamental analysis, stocks get driven down by short sellers and then rebound as the shorts cover, often returning to the original or perhaps better price point. All that was accomplished was that some traders made money while investors potentially were scared out of a position at a loss. This is the ultimate goal of a short seller, to ignite a selling frenzy that hammers the stock price.

There are ways to bet on the future of a stock via calls and puts but short selling is the only way to potentially impact the stock directly without actually owning it.