Don't Short Me, Bro!
March 20, 2009 6:45 AM Subscribe
How does short selling stocks harm the underlying company? To my way of thinking, it shouldn't.
posted by gjc to work & money (28 answers total) 7 users marked this as a favorite
But Samantha Bee on the Daily Show seems to think it does. Earlier this week she did a piece about the short sellers and made them out to be among the bad guys in the current financial storm.
But I don't see how this hurts the companies that the stocks are in. Unless those companies are somehow leveraged to their own stock, which seems like a not so good idea regardless of what happens.
A hypothetical, as I understand it: XYZ Corp. decides to go public. They sell a bunch of shares in the company. They take the cash, and give up slices of ownership. Once the original purchaser buys that stock, that original purchaser can do with it what they please. It's out of the hands of XYZ Corp. Now, I decide XYZ Corp.'s stock is going to go down, and I want to make money off of that. Say it's at $20. I find someone holding stock who is willing to let me borrow it for a while. I borrow that stock and sell it at $20. Now, time comes that I need to give the stock back to who I borrowed it from. Lucky for me, the stock is down to $10, so I buy the stock back and return it. And I've doubled my money. But XYZ Corp. isn't involved in that process. The only loser in this scenario is the clown who decided to sell their stock at $10. And they are only losers if they bought the stock for more than $10. If they bought it for $5, there are no losers in that scenario.
What am I missing? Or, is she wrong?
(Obviously, this assumes the people doing the short selling aren't engaging in market manipulations. They are doing it on the up and up, within the rules.)