Should Short-selling Be Banned?

Well, there is a temporary ban on short selling in a bid to reverse the recent downtrend in stock markets. I do not believe that short sellers are the baddies.

Short-selling is a very risky business. You can make a lot of money as we saw on Monday 15th September 2008, and you can lose MEGA-MONEY when there is a major reversal as we saw yesterday and seeing today.

I know from past experience that it is not something you embark on without extensive research and serious consideration to the financial consequence of short-selling any stock.

In my view, when a short-seller takes an interest in a company, you can rest assured that it is because that enterprise has problems. Ask yourself, is it a coincidence that the most shorted shares have been banks, retailers, and of course, house builders?

ABSOLUTELY NOT.

I firmly believe that when someone short-sells a stock he or she is just capitalising on the underlying problems of the enterprise. Open trading involves optimists and pessimists. A healthy stock market needs the equilibrating influence of both to ensure fair and open competition, and ultimately reward the achievers with share-price appreciation and punish the lame ducks with share-price depreciation.

The optimists are the bulls who believe that the stocks supported by them will keep rising inspite of known problems. Conversely, the pessimists are the bears who believe that the stocks they are shorting do not deserve the trust and support of the market.

I believe that the banks are the primary authors of the current crisis. I am a property investor and I have witnessed wildly irresponsible lending by the financial institutions. I have seen 125% Loan-To-Value,interest-only loans at either a ridiculously high income ratio, or under self-certification.

I remember a worried prospective borrower being reassured by a broker with the following off-the-cuff statement: "Worry not about interest rates or the capital, in a couple of years you will be able to remortgage to a better deal and you can then either reduce your capital with the increased equity, or use the money to go on a world cruise".

Unfortunately, the subprime fiasco and the subsequent credit crunch have destroyed the financial stability of many people, including myself. There are many unlucky homeoners who are staring at not only negative equity, but also increasing repayments on debts that they cannot afford to service.

Will the risk of unemployment help them? NO.

Will banning short-selling help them? DEFINITELY NOT.

Should you rush out and capitalise on the euphoric optimism that is causing the stock markets to experience bullish reversal? I wouldn't.

At the moment there is only one market for me, and I shall not look at either property or equity for a long time.

Abimotala