Troy: An excellent explanation of the role of short selling. One other thing I would add:
The amount of capital in the economy available for companies to use is large, but not infinite. Demands for capital are effectively infinite. Money that gets invested (I am talking corporate finance here, not stock market transactions) in one company is money that is not available to some other company.
Let us suppose that one is doubtful that SOLV's approach to getting oil from tar sands is economically sensible. By shorting the stock, one is putting downward pressure on its price and making it just a little bit harder for the company to raise the $600,000,000 it now says it needs.
But that is great! That means that there will be $600,000,000 more available to fund other companies doing other things that, in the eyes of this hypothetical shorter, have more value to society. The money may be used for starting or expanding other businesses, or funding research for a cancer cure, or who knows what? It doesn't matter. If SOLV's approach is a bad one, then giving capital to the company is bad for society. It makes us all poorer in the long run.
In the end, that is why capitalism triumphed over communism. We have a mechanism - the stock market - to make sure money goes where it belongs and stays out of where it doesn't. Socialist systems are constantly investing money in the wrong places because of political pull, bad central planning, corruption, etc. So we end up with booming high tech businesses, efficient service companies, and so forth, while they ended up with a bunch of factories producing things that nobody wanted to buy.
If you think a company is going to waste the capital given to it, then it is almost immoral if you DON'T short it, assuming your personal finances allow it. I am not as moral as I should be - I don't short everything that I think deserves it, but I do try to do my small part for society wherever I can. |
