Hi mst2000; Regarding: 2. I do not think shorting per se affects the price of a stock, because borrowing shares on margin does not increase "supply" - what causes the price of a stock to go down is poor financial performance, bad news, failure to meet deadlines, and other matters that give rise to selling pressure.
I agree that bad financial performance drops a stock, but that is certainly not the only thing. Very few traders would doubt that increasing the supply also reduces the stock price (read any economics book for the supply/demand curve), and it is obvious that shorting increases the supply of a stock, and therefore will drop the price.
I suppose one could argue that the stock's price will not change in terms of fundamental concepts like total return of dividends and earnings and that sort of thing, but not very many traders actually use those concepts. Instead, people decide that they want to have 100 shares of "linux", for instance, and buy RHAT at whatever price.
The total amount of available stock is the float plus the amount shorted. One of the things that I have noticed is that stupid story stocks tend to reach their peaks at about the time that the float gets up to 50% or so of the total outstanding. After that point, it becomes more and more difficult to corner the market, and the stock price drops.
Sorry to bust in on the conversation, I don't follow the issue you guys are talking about, so I don't have anything to say about it, just on the influence of short selling, or more particularly, a sudden increase in the amount of shares sold short.
-- Carl |
