Makeover needed: Short selling stocks

I agree that short selling is, for the most part, bad. But you have to go much deeper. The stock market used to be an investment tool. You did your due diligence, found a good company with good prospects, and you invested in it with the idea that it would continue to prosper, the stock price would go up and you would make money over time. Now, with puts, calls, stradles, shorts, etc. it has become Las Vegas. "Investors" don't want a company to do well, they just want it to vacillate up or down quickly. It's the volatility, not the quality, of the company that people are interested in. Down is as good as up if you are on the right side, regardless of how the company is doing. Margin buying at one time was 10%, but it was determined that was too little, which I agree with. But you can buy puts or calls, which basically gives you control of a stock, and for only a couple percentage points your control the stock, pure gambling. Stricter regulation on all facets of the stock market are really necessary.

Gary,

How would frauds at Enron, Worldcom, Tyco and, quite possibly, Lehman, Novastar and many more have been uncovered without short sellers?

if you believe in the efficient markets hypothesis, and that we desire the state of strong-form efficiency, which basically means that the market is 'fair' (for lack of a better term), then you should support short selling.

Short sellers tend to analyze stocks better than anyone (vis a vis the tenets of behavioural finance), and are needed to place the appropriate value in negative information about a stock.

It's fair to hate them, much in the same way we hate flies, rats, and maggots. But eleminating them has noticeable negative consequences.

Besides, look back at the ban, and see if that helped financial stocks stabilize. I think you'll find that the answer is 'no'.

I think a ban on premarket trading should be in effect. Often after a poor earnings report the stock has tanked before the common man can get out or vice versa.

Well said beanspants.

www.eeinvesting.com

..."the sole purpose of short selling is to profit from misfortune while taking as little personal risk as possible."

Little personal risk? Hardly. There's actually a great deal of risk in shorting stocks. If you're wrong, and your position is large enough, you could lose your shirt. Without shorting, there's no counter-balance to the blind optimists and outright frauds who hype stocks. Why should all the dynamics be on the up side?

Gary, you want to talk about Tyco, Enron, and Worldcom as a reason to short? The Short sellers of those companies as well as many others made tons of money, while the people who actually BOUGHT the stock with their hard earned money were able to get very little, if anything, when they tried to sell. The shorters, who made no investment, had completely decimated the share price, and left nothing for the investers who were not "in the know" until it was too late. I believe that the investors should have the first right to get their money out of a company that may be going belly up. Otherwise why even bother calling it investing. It is just gambling.

The practise of short selling should indeed be made a lot harder, there is to much of it and it has caused the stock market woes in part.

Everyone blames the trader for the problems of others. When the price of oil was rising faster than the grass grows in your yard, it was the traders fault.

now that the stock market is falling, once again it is the traders fault because they are selling .

Try looking at the big picture, why was oil rising? Because the oil producers were pushing the price up!!!
Why is the stock market falling? Because everything is overpirced!!!!

Every market has cycles There is a top and a bottom. William Gann was a trader who was able to predict the tops and bottoms on the exact time and day. No one blammed him for the great depression.

A Russian economist, Nikolai Kondratieff,(1892-1938) saw patterns in the markets , of a boom and bust cycle that accured every 54- 55 years and predicted that companies, would in time ,be unable to repay thier loans and go bankrupt.

Do you now want to blame a dead Russian for what is happening?

The people who are in charge of these companies are at fault. Banks who would finance anyone just to make a buck, have now paid the price, automakers and dealers who have drained the consumers pockets whit inflated prices and gas guzzling vehicles now feel the pain.

There is no misfortune of others in any marke, stocks,futures,forex.
the market are a zero sum game. in other words if I loose a $1 in trading, someone gains a $1.

Can't any of you see the big picture, look at any chart, what way is the marke going? The trader is following price, price is the direction the chart is going, it does not matter if price is going up or down. The trader will follow price.

The big boys whether it is a bank or an oil company are the ones that control the direction of price, They are the ones with thedeep pockes and can hold on with millions of dollars in losses. How many traders do you think would risk a million bucks on a trade (deal). Most are in for the day only, so they are following the action of price for that current day.

Short selling is not the villain, naked short selling is. If you own the stock and want to short it to protect against an even bigger potential loss, that is rational, and sends a signal to the market about the potential value of the stock in question. But to short a stock you don't own has always (or for a very long time) been illegal, and this should be better enforced to reduce volatility. Those reneging on the short sale should face serious repercussions, possibly including a suspension or ban on their trading.
Another factor in the "Las Vegas" market we now have is the trading of derivatives. I read an article (forget where) that suggested that derivative trading should be regulated like taking out a life insurance policy: as one can take out a life insurance policy only on certain relatives, a business partner under certain conditions, etc., only those holding the underlying securities should be able to trade derivatives. This would help ensure that those trading have some knowledge of what they are buying, since they hold the underlying items. Another recommendation was to have derivatives traded on a separate market from stocks, which would insulate the "regular" stock market from the swings caused by derivative trading (which is currently unregulated as a result of financial industry lobbying [and some policymakers should answer for that]).
As a final comment, I quote Warren Buffett on investing in stocks: "Buy a company, don't rent a piece of paper."