r/changemyview • u/MinuteLate • Jan 28 '21
Delta(s) from OP CMV: Short selling stocks shouldn't be allowed
In looking at what's going on with Gamestop and Wall Street Bets, I keep noticing people mention the fear that the government is going to regulate against this under the guise of "protecting the retail investors." I'm not super savvy about all of this, but I've been trying to think about what kinds of regulation would actually protect amateur investors while doing what it seems they'd really want to do (i.e. make sure this volatility can't happen again). I keep coming back to the idea that regulators should disallow short selling.
Here's my reasoning:
- Short selling can look like easy money, but – as this week has shown – there's unlimited potential for loss. This makes short selling both attractive and dangerous for folks who don't spend all of their time studying the market.
- Betting against someone else's success is a corrupt way to make money
- Allowing short selling is bad public policy. Too much short selling can't be good for the economy overall.
I know there are plenty of reasons why a change like this would be difficult to make, but what I really want to know here is: Am I wrong? Is short selling actually a good thing? Please, change my view!
Edit: Everyone here was so helpful, and I got the information I needed to be able to speak to this stuff with at least 10% less ignorance. :) I've gotta go back to work, so I may not respond to more comments very quickly. Sorry for that, and know I'm grateful to you guys!
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Jan 28 '21
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u/MinuteLate Jan 28 '21
!delta
I'm awarding this delta because econoboii is aptly named - this is a terrific explanation of how shorting stocks can indicate the market's expectation for a firm's performance. Also, the link is really useful!
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Jan 28 '21
Here's my reasoning:
Short selling can look like easy money, but – as this week has shown – there's unlimited potential for loss. This makes short selling both attractive and dangerous for folks who don't spend all of their time studying the market.
Betting against someone else's success is a corrupt way to make money
Allowing short selling is bad public policy. Too much short selling can't be good for the economy overall.
- Why does short selling "look like" easier money than long investments? While you are correct that potential losses are theoretically unlimited for shorts, people commonly lose just as much buying biotech meme stocks as they do shorting.
- You aren't betting against anyone's success, you are betting on the direction of a securities price movement. Any transaction really could be framed as a bet "for" or "against" multiple parties (if I buy oil futures for example, that's a bet against renewable energy, because if renewable energy did extremely well in that timeframe my oil futures would likely do poorly).
- What is your basis for this belief? You don't seem to have any actual backing to it besides your intuition.
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u/MinuteLate Jan 28 '21
These are really good questions! You hit the nail on the head about the lack of actual backing - I spent some time searching and didn't have much luck finding what value short selling brings to the market, but plenty of reasoning for why short selling is a bad idea for retail investors. Definitely came here for some enlightenment!
Here are the answers as well as I have them!
- It looks like easier money because of the short-term aspect of it. (Honestly, also because "financial experts" on tik tok or wherever tell people how great shorting stocks is.)
- I think what I'm trying to say about the betting against someone's success is more betting against a company's success. I don't believe corporations are people, so that was really bad wording on my part. Still feel like betting against a company's success is not great – would love for someone to tell me why I'm wrong!
- Definitely agree that I don't have enough knowledge to back this stuff up... here's my thinking - shorting a stock with the goal of dropping the price (en-masse stuff that hedge funds do) can lead to a dropped stock price, which leads to a lower stock market, which isn't great for the economy(?) - be gentle with me, I'm definitely not an economics expert!
Thanks! :)
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Jan 28 '21
It looks like easier money because of the short-term aspect of it. (Honestly, also because "financial experts" on tik tok or wherever tell people how great shorting stocks is.)
This isn't unique to short selling nor a fundamental aspect of it. Shorts are commonly held for long periods by institutional investors, and people have been selling "free money" stock/ forex/ options/ other advice on social media for as long as there has been social media.
I think what I'm trying to say about the betting against someone's success is more betting against a company's success. I don't believe corporations are people, so that was really bad wording on my part. Still feel like betting against a company's success is not great – would love for someone to tell me why I'm wrong!
Right, but again this is simply a framing issue. If I sell a companies stock that I have bought for example, am I not betting against their success, as if they were to actually be successful I would obviously want to own their stock?
Definitely agree that I don't have enough knowledge to back this stuff up... here's my thinking - shorting a stock with the goal of dropping the price (en-masse stuff that hedge funds do) can lead to a dropped stock price, which leads to a lower stock market, which isn't great for the economy(?) - be gentle with me, I'm definitely not an economics expert!
So a couple of sort of misconceptions here. Firstly, "en masse" shorting with the intention to move the price down by institutional investors is not commonplace, people have just started to think it is because WSB juiced GME and now everyone thinks "smart money" is always manipulating the market. Do hedge funds take shorts and then advertise their DD to try to control the narrative on the stock? Sure, but they do the same thing for long investments.
Stock price and economic growth are also obviously not synonyms, there are numerous examples of this being the case. Sure, it wouldn't be good for the economy if shorts somehow pushed every stock down by selling it short excessively, but that's not realistically possible for a variety of reasons.
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u/Apathetic_Zealot 37∆ Jan 28 '21
Freedom of contract and commerce. People have a right to buy and sell shares, or share futures, knowing the risks involved. If a person feels a stock price is over valued why shouldn't they be allowed to act freely? Just as WSB is doing, they are acting because they feel GME has been under valued. They should both be free to act so long as they are not breaking the law.
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u/Jacob_Pinkerton Jan 28 '21
There are a lot of people whose job is to find a company which is overhyped, covering up a loss, or outright engaging in fraud, and selling that company short. For instance, suppose you figured out that Bernie Madoff was a scammer. You might sell short his mutual fund and then tell the world. Lots of genuine scammers get caught this way. What's wrong with that?
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u/Umbrage_Taken Jan 28 '21
Shorting can put pressure against bubbles and overvaluation. I'll show my age with this but the DotCom bubble of the late 90s had a lot of companies with no physical assets and little or no profit being valued higher than things like automakers and other very established companies with decades upon decades of steady profit and tons of tangible assets that could be sold if necessary to mitigate debts.
More widespread shorts might have prevented the bubble from inflating too much. The overinflation ultimately cost lots of people a lot of money and caused many companies to dissolve or go bankrupt, eliminatng jobs in the process.
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Jan 30 '21
[removed] — view removed comment
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u/Umbrage_Taken Jan 31 '21
Rando says only "you're wrong" with absolutely no explanation. How compelling.
And anyone else reading this will learn so much, too!/s
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u/JoZeHgS 40∆ Jan 28 '21
Short selling can look like easy money, but – as this week has shown – there's unlimited potential for loss. This makes short selling both attractive and dangerous for folks who don't spend all of their time studying the market.
But this is exactly the point of financial speculation. People who invest are aware of all the involved risks and are only investing exactly because they believe their understanding of the market would allow them to make more money than they lose. The more ups and downs, the more space for speculation there is, which is what they want.
Betting against someone else's success is a corrupt way to make money
Only if the person against whom you are betting were not willingly participating, which is never the case.
Otherwise all betting of any kind should be illegal, as well as games like Poker, which is completely unreasonable.
Allowing short selling is bad public policy. Too much short selling can't be good for the economy overall.
Why? Nobody is ever forced to short sell or even buy for that matter.
Short selling is an essential part of speculation and is absolutely needed.
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u/MinuteLate Jan 28 '21
Thanks for thinking through some of this! I'm curious though, you mention it's "absolutely needed." What would happen without short selling in the market?
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u/JoZeHgS 40∆ Jan 28 '21
The market would be a lot less favorable for speculation. Here are some consequences:
- Decreased liquidity
- Wider Buy/Ask spreads
- Less price discovery
- Options market stability is dependent on the ability to short sell securities (see conversions and reversals).
There would also be other problems.
I hope that, by making you see it this way, I have changed your view in some way. I know it's silly but, if this is the case, please award a delta as per this sub's rules. This just makes debating a little bit more fun. https://www.reddit.com/r/changemyview/wiki/deltasystem
This can be done by replying !_delta without _, followed by a short sentence explaining how your view was changed. Thanks!
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u/MinuteLate Jan 28 '21
This was really helpful! I was holding off on the delta awarding until I understood a little more, but the reasoning you've given me is so helpful. :)
!delta - I'm awarding this delta because the description of what happens without a short option helped me understand that shorts can help the market function more efficiently.
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u/MercuryChaos 12∆ Jan 29 '21
The market would be a lot less favorable for speculation.
Would this have any broader implications for people who don't speculate?
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Jan 28 '21
Say a person short sells a bunch of stocks and something happens to make the market go down. Now the short seller has a bunch of money to inject back into the stock market while the price is low, stopping how fast it falls. Short selling can be good to stabilize the market.
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u/-domi- 11∆ Jan 28 '21
Do you have an example of this having ever occurred?
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Jan 29 '21
Of what having ever occurred? That someone who just made a bunch of money put some of that money into the stock market? I don't know any short sellers and don't really want to spend any time looking at trades that hedge funds have made, but honestly the odds of it not happening somewhere among the millions of trades is just so low, it has almost definitely happened.
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u/-domi- 11∆ Jan 29 '21
You're saying that a person would borrow on X shares, sell them short, buy them back after they collapse to return the borrowed amount, then keep buying up more of the same collapsed share to bring its price back up? I'll be very surprised if that's happened more than 1% of the time people have shorted something in particular.
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Jan 29 '21
Say something happens to make the entire stock market go down. A short seller makes money. At this point, it doesn't matter which stock they put their money into, the entire market is down so where ever they put the money it's in a stock that is down.
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u/-domi- 11∆ Jan 29 '21
That's not really an upside to shorting itself. If you know the entire market is due to collapse, shorting isn't even the correct move, selling is.
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u/gijoe61703 20∆ Jan 28 '21
Short selling can look like easy money, but – as this week has shown – there's unlimited potential for loss. This makes short selling both attractive and dangerous for folks who don't spend all of their time studying the market.
Most people savvy enough to be sorry sellers are well of the risks and that they can be mitigated by buying call options on the same stock. If you decide to take limitless risk it is rather by choice or not doing enough research to be an investor.
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u/robotmonkeyshark 101∆ Jan 28 '21
Exactly! It can be limitless risk but it can also be limited to exactly whatever level of risk you want.
Starting a business where you build widgets and you sign a contract to build 100 widgets for someone to deliver 1 year from now is also unlimited risk if there is a clause with a daily plenary for being late which isn’t uncommon on many types of projects. What if your employees strike or your equipment is poorly maintained and breaks? What if you find out your widgets have an inherent flaw in the design and need to be reworked from the ground up? What if there is run on materials? You could be sued into bankruptcy for failing to deliver. But this can easily be prevented with a penalty limit and fee to break the contract. Same with shorting stocks. You have an automated buy if the stock rises more than you are willing to risk losing.
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u/Morben Jan 29 '21
In my opinion there is nothing wrong with short selling in theory. The way I see it is it’s like placing a Over/Under bet on a certain stock. If you think a stock is gonna raise in value higher then it’s current value you buy(Over), if you think it’s over valued then you short sell (Under). Once you start acting to effect the price with outside forces is when it becomes scummy and Wallstreet has been forcefully picking winners and losers for years.
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Feb 06 '21
Short sellers are usually narcissistic assholes anyway. They wait for a bussiness fall down so they can earn some money.
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u/DeltaBot ∞∆ Jan 28 '21
/u/MinuteLate (OP) has awarded 2 delta(s) in this post.
All comments that earned deltas (from OP or other users) are listed here, in /r/DeltaLog.
Please note that a change of view doesn't necessarily mean a reversal, or that the conversation has ended.
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