What’s Wrong With Shorting Stock?


The NYT featured an extraordinary comment by a Merrill Lynch strategist in an article on how the wealthy are often able to make money in a period of market volatility:

“There seems to be a moral argument against shorting, but from a purely practical point of view it leaves (hedge funds) in a better position to manage volatility.”

It would have been interesting to know what the moral argument is against shorting.

When an investor shorts a stock they are betting that it is over-valued, just as when they buy a stock they are betting that it is under-valued.

In both cases, in principle the investor stands to lose their own money if they are wrong, but they are giving information to the markets and helping to appropriately direct capital if they are right.

If a company’s stock is over-valued, then it benefits the economy to drive the price down so that it will be more difficult for it to raise capital in the future.

In the standard economic story, this would mean that more capital will be available for corporations that have more growth potential. The loss of wealth by the company’s shareholders would also free up resources to be used elsewhere in the economy.

In short, there is symmetry between buying and shorting a stock. There is no obvious reason that one act would be viewed as more or less moral than the other.

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