10/06/2008

The badness of short selling

Short selling came to attention recently and the US even banned it for a short while. SGX did banned short selling which I find amusing for the reasons and the nature of it. SGX is only against naked short selling. But the big boys or anyone can short the whole market till kingdom comes if he has the ability to borrow scrips to cover his short position. Why is short selling bad? It goes against the principle of investing in stocks. Investors put money into stocks for its potential to grow. The better the company is managed, the better chances that it will make more profits to reward its shareholders, thus leading to higher share prices. With short selling, the fundamentals of share investment have changed. It becomes gambling. The funds are saying that they can make money by buying or shorting the market, regardless of fundamentals. It is no longer whether the company is good or bad. Good company can still be shorted and its price forced down by short sellers to make their profits. How so? Over the years, many small investors have lost their money in the stock markets for many reasons, a shrinking economy, too many stocks, too many derivatives, too little money and of course short selling. We have reached a stage when there are just not enough small investors in the market for fair play. And the shortists, mostly big funds and house traders, have unlimited resources to short out the buyers. The one who who is able to keep on buying or selling wins. This is the game in the market today. Even very sound companies are not seeing their prices moving up. They all fell victims to this new gambling strategy. When there are few small investors buying, the big boys just short and force them to sell at a loss. Investors beware. Only when the big boys start to buy up the market will the stocks run up. But there are no one buying the market except the small investors. And they are either stuck for the very long haul or have to cut losses and get out. This is the new game play.

6 comments:

Matilah_Singapura said...

Complete hogwash. Selling short makes for a more efficient market, and also allows investors to hedge against potential losses.

When the govts intervened, they did a very bad thing. A falling market means goods (shares, bonds , commodities etc) are clearing at LOWER prices. By interfering, the market-clearance mechanism is distorted. People are left holding depreciating assets which can't clear because the cannot take short positions to at least attempt to recover some losses.

Fuck the govt! They screwed up a lot of people — many of whom knew what they were doing.

(Not me. I was out over a year ago)

Anonymous said...

Short sellers are market participants who are closest to being heroes in this debacle - they were the ones who had been trying to reveal the truth.

Matilah_Singapura said...

Exactly.If a company has turned to shit because it made bad decisions or management was dishonest in their actions, then the stock price should be allowed to be BID DOWN according to what individuals value the stock at.

By stopping short-sales the fucking govt is protecting the guilty,and therefore the guilty get away with there bad behaviour, and everyone ends up paying for that.

Where are the political assassins when you need them.

redbean said...

not true. under the present system, the short sellers can short any company indiscriminately. good or bad companies are at their mercy.

the stock exchange better wake up to their idea and relook at the present system, do an overhaul and go back to basics. we cannot afford to dance with the devils. we do not know what they are up to

Anonymous said...

Short selling isn't gambling. You can ask any investor to try short selling a company that is doing very well and see if any of them want to do so. Short selling is a avenue for investors to make money out of a falling market, banning it reduces liquidity and allows big players or market makers to have a larger control of the market.

redbean said...

hi anonymous,

in a perfect market when there are many players, short selling is not that bad. ours is an imperfect market when there are very few small players and a few very big players. the big players actually determines the direction of the stocks.

look at the blue chips and how they behave and you will know.the short sellers just keep selling and there are very few buyers. what happens?

our system has many flaws which i have listed in my post. look at the number of penny stocks in our market and it will tell you one story.