Short selling (controversy)

There are some controversies behind short selling.

In the 1800s and early 1900s, manipulation and insider trading were rampant in the stock market. Sometimes a stock was shorted in order to create a bearish sentiment and drive investors in a panic to sell a stock, bagging a large profit for the short sellers. This type of trading was known as a “bear raid”. However,  “Reminiscences of a Stock Operator” disagrees with this theory and believes that true bear raids are few, and that it is only used as an excuse by management to explain for a down stock price. The logic goes that if the stock were truly valuable, management could organize a pool to force a short squeeze on the short sellers. Essentially, if the short sellers were truly shorting something that was undervalued, the market would gobble up the excess shares and the short sellers would be forced to cover at a much higher price.

Most financial professionals believe that short selling is essentially harmless. They argue that shorting a stock allows an overvalued stock to fall back to an equilibrium price faster. Since short sellers will eventually have to cover, they also act as a support for the price later on.

However, many controversies still revolve around short selling. Plenty of it is nothing but populist thinking. For example, a politician may blame short sellers for the decline in the market, when in reality the economy may be in a recession. A more ridiculous version would be a politician blaming short sellers for “endangering people’s retirements.”

Related Terms

Popular Articles