LOOKING AT
SHORT SELLING. A stock’s value changes second by second, day in and day out. The factors that affect a stock’s value can range from overall industry performance to natural disasters. Even the buying and selling of stock can affect its price. Short selling is one such speculation that can contribute to a stock’s value1. For some experts, short selling is un-American and for others it is a necessary evil.
77% in 1990 to 127% by the end of 2007. There is still a lot of risk in the financial market as individuals still find themselves with personal debt that is hard to repay.
Banks and other financial institutions however are now using a much more stringent model when it comes to assessing an individual’s ability to repay their personal debts.
Is consumer debt still a problem?
In short yes. Consumer debt is still a problem for many countries and this trend looks set to continue. This is due to the level of consumer debt that was generated in the years leading up to the financial crisis with lenders not placing as much emphasis on risk assessment and credit management as they should have.
Credit cards are still a huge problem around the western world as consumers are putting more and more ‘essential’ items such as groceries on them. This leads to growing personal debt and no positive outlook to repay these cards. There is help on the horizon however as banks are slowly moving towards being more stable and this is reflected in their lending. Today credit checks are much more stringent and many of the old and unstable financial products such as 100% mortgages are not available to the majority of consumers. Now the focus lies on rebates, special offers and trinkets designed to keep consumers away from credit cards.
THE -ELEVATOR.COM THE -ELEVATOR.COM
THE MARKET. An individual who wants to short sell a stock is betting the stock will drop in price. A short sell makes money because the individual has 3 days to cover their stock sale. Therefore, a person who sells stock today at price X will be able to purchase it 3 days later at a lower price Y to deliver the stock to his/ her buyer. The seller makes a profit from the difference between the sale price and the purchase price. The gamble lies in whether the stock goes up instead of down in price. In this case the seller ends up paying a higher price for the stock 3 days later and loses money.
HOW IT AFFECTS THE MARKET. Stock traders will
short sell when they believe a stock is priced too high and when they anticipate a drop in the near future. If several traders short the same stock, this could be an indication to the stockholders that their stock is going to drop in price. As a result they scramble to sell their stock, causing a glut on the market and resulting in a further increase in the drop of the stock price. On a large scale this shorting can cause a drop in the overall market.
DOES IT HURT THE ECONOMY?
In 2008, the SEC banned short selling in the market. According to the SEC as well as several government politicians, excessive short selling helped to contribute to the severe downturn in the stock market and the world economic financial collapse. Yet argument can be made that short selling is a means of naturally correcting over priced stocks and it was largely the mortgage and bank collapse that were major contributors to the failing economy 2. The debate rages on amongst our economists, financiers and politicians of modern day. To some, short selling is an evil that should be banned. In fact, many consider it unethical to bet on the failure of a stock or the market as a whole. To others short selling is a necessary function of the stock market to ensure stock prices reflect their true value.
1 - Warren Buffett Wealth: Principles and Practical Methods Used by the Worlds Greatest Investor, Robert P Miles 2004 2 - Prohibitions versus Constraints: The Ô 08 Short Sales Regulations, Kolasinski, Reed & Thornock March 19. 2009
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