434 2 #1 February 11, 2009 Can anyone tell me why we do allow short selling? Is there any other economic model we could have based a trading system on instead of a global stock marked? In finance, short selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale. Short selling is done with intent of later purchasing the financial instrument at a lower price. Short-sellers attempt to profit from an expected decline in the price of a financial instrument. Short selling or "going short" is contrasted with the more conventional practice of "going long", which typically occurs when a financial instrument is purchased with the expectation that its price will rise. Thus, being "long" is just a way of saying that you own a positive number of the securities; being "short" is just a way of saying that you own a negative number of the securities. Typically, the short-seller will "borrow" or "rent" the securities to be sold, and later repurchase identical securities for return to the lender. If the security price falls, the short-seller profits from having sold the borrowed securities for more than he later pays for them. However, if the security price rises, the short seller loses by having sold them for less than the price at which he later has to buy them. The practice is risky in that prices may rise without bound, even beyond the net worth of the short seller. The act of repurchasing a shorted security is known as "closing" a position. http://en.wikipedia.org/wiki/Short_selling Quote Share this post Link to post Share on other sites
quade 4 #2 February 11, 2009 QuoteCan anyone tell me why we do allow short selling? For the same reasons we allow people to buy on credit or buy commodity futures. It allows a people to buy and sell items in a flexible way. Let's say I'm going to start up a business via eBay. My business model is to buy low and sell high. Since I'm selling via the internet, YOU don't need to know whether or not I actually have the item in stock. To you it doesn't matter in the least. All you need to know and all you care about is getting the item at the price I've set. I sell you the item and then -I- go shopping for it at a lower price than I sold the item to you. I ship you the item, I make a profit, everybody is happy with the transaction. If I can't find the item for a lower price than you paid for it, I'm going to take it in the ass, but you'll still get your item. That's all short selling is or ever was.quade - The World's Most Boring Skydiver Quote Share this post Link to post Share on other sites
Andrewwhyte 1 #3 February 11, 2009 The truth is during most market sessions the selling of shorts is a market calming device. If a stock is rising rapidly it is likely to overshoot it's new equilibrium position as emotion and market momentum swamp cold evaluation. The smart investor senses this and sells short, thus putting downward pressure on a rising price. This dampening effect limits both the overshoot, and the resulting downward oscillation of the price. While the price is falling the existing shorts represent latent buying pressure During a market correction (or crash) the practice has the opposite effect and exacerbates the instability, but that is the exception, not the norm. It is also the only time the practice makes the news. Sort of like the only time RSLs get discussed on DZcom is when they cause a problem. Quote Share this post Link to post Share on other sites
StreetScooby 5 #4 February 11, 2009 Quote In finance, short selling or "shorting" is the practice of selling a financial instrument that the seller does not own at the time of the sale. By law, the seller must have borrowed the shares. Unfortunately, many do not borrow the shares, and engage in "naked short selling". That's illegal, but difficult to enforce. Naked short selling should absolutely be illegal, but short selling itself is an essential part of the free market system.We are all engines of karma Quote Share this post Link to post Share on other sites
