Populist politicians, talentless company leaders, dreaming idealists are often blaming short sellers for the decline of one or other share, bond, and sometimes even for the problems of whole industries, countries or societies. In their opinions, short selling causes starvation and misery, blocks progress or scientific research, investing or development.

Whipping-boys

Sometimes politicians are banning short selling, for example in the case of bank shares, after the Lehman Brothers-crash. The nameless short sellers are much more easily to incriminate for a crisis, for example, than Mr. President “X” or Mr. “Y”, Chairman of the National Bank.

As I wrote some days ago about selling Tesla (and buying VIX shorts at the same time), some people were blaming me for similar acts. “Elon Musk started Tesla for the sake of accelerating the world to sustainable energy, not for the sake of making money” – wrote somebody. What? A CEO of a stock exchange-listed company, not interested in making money? Short it! Short it much more!

Good fairies

“Shorting Tesla (...) a terrible idea, and one that is acting against a company working tirelessly to change the world for the better” – wrote somebody. Nice, but we are happy today also without Betamax technology, VHS was enough for most people. Macintosh was better than IBM PC 30 years ago, but the better one almost disappeared.

I think other carmakers will also make good cars, like Audi, BMW, Chevrolet, Citroën, Fiat, Ford, Honda, Hyundai, Kia, Mercedes-Benz, Mitsubishi, Nissan, Peugeot, Renault, Volkswagen, and the list isn’t complete. (Longer list on Wikipedia.)

The two sides

But back to short selling in general. Short sellers are making two things: Selling, and buying back. Long buyers are making also two things: Buying, and selling again. Sooner or later. The difference is only: When? Which transaction comes first? Sellings are pushing the prices lower but buying, up. Every short seller becomes a buyer, and every buyer becomes a seller some day.

Short sellers are increasing the volume, the liquidity of trading on stock exchanges. And you know what? Short sellers are the best buyers, because sometimes, they have to buy, at any price. If the margin call leaves them no other option, they are obligated to do so. (See the Volkswagen shorting story of 2008...) If there are no short sellers today, there will be fewer buyers tomorrow.

Shorting and feeding

Short sellers are making a low stock price and the company won’t be able to invest, or produce more – are saying the foes of shorting. Production declines, people are getting poor because of short selling – some of them say. I told you short sellers will elevate the prices also, only later. But, what about commodities?

Are short sellers bad people shorting stocks, and good people shorting wheat, or rice? Because, at least what some people say, if shorting really lowers prices, shorting food should be a beneficial, charitable act. The poor will have lower prices, can buy more food, fewer people starving, should be great, or not?

Who is more important?

But, what happens with the poor farmers producing this food? What if these low prices ruin them? Especially in the underdeveloped countries, where no social protection system is present. The price of some commodities, like cocoa, sugar, coffee, soya, cotton, for example, can decide who lives or who dies.

Is high crude oil price good or bad? In this case, inflation surges, production costs of many companies also are increasing. Economic growth can be lower, some people can lose their jobs. But if the oil price falls, people in the oil industry can lose jobs. Fuel consumption surges, contamination increases. And development projects of renewable energy production, for example, or of electric cars can be slowed down or stopped.

It depends on

Then, is short selling good, or bad? It depends on. Sometimes good, sometimes bad, it depends on the person, group, circle of interest, product, situation, the point of view.

But the abolition of short selling would only cause less liquidity in the markets, more volatility, and may be fraudulent shorting services, products, illegal solutions. Or the rise of exotic investment places, foreign markets.

Disclaimer:

I am not a financial advisor and this content in this article is not a financial or investment advice. It is for informative purposes only, or simply to make you think, entertain, increase testosterone and adrenaline level. Consult your advisers before making any decision.

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(Cover photo: Pixabay.com)