Short-selling is making a bet that a company’s share price will decline. Brokerage firms loan shares of stock to the short-seller who assumes the risk of the trade. If the short-seller is correct, he will profit from the trade. If he is wrong, and the share price appreciates, he will lose money on the trade. The brokerage firm earns margin interest either way. Short-selling is particularly prominent in the hedge fund industry.
When the uptick rule was changed (which specified that one cannot short a stock unless the previous trade for the stock was an uptick in its value), I thought it was a good thing, that it would make markets “more efficient”. I didn’t really think about the law of unintended consequences. But now that I have seen the human cost of short-selling, I deplore it.
I don’t aspire to profit from the failure of a company and I don’t want to willingly contribute to its demise. Each ticker symbol that trades on an exchange (whether it is a stock or an ETF) represents the hopes and dreams of countless scores of employees, investors and their families. Those people have dignity and value.
Granted, not all companies are good companies. That might be due to industry circumstances or human (i.e. management and/or labor) factors, and if I make that assessment, I simply sell the shares. That is the dignified way to manage money. There are countless good companies and opportunities to make money by investing in positive development.
Shorting a company’s stock destroys the wealth of its shareholders and stakeholders. The short selling of financial stocks in 2008 was the equivalent of a back-door run on the banks. It was like holding a drowning man’s head underwater and refusing to let him up to breathe. Short-selling traders made a killing by undermining our financial system and the security of billions of people around the world. The human cost to the financial industry employees and shareholders and the panic that ensued around the world will probably never be adequately measured.
The problem with the investment industry today is not that it is under-regulated or overly greedy (it has always had an ample measure of both). The problem is that it does not recognize the dignity of people, which is the essence of fiduciary responsibility.