Banning Short Sales on Wall Street

This is a phenomenal idea. Banning short sales. We should try it for a while:

Four European countries are banning the short selling of stocks in their markets to try to halt the precipitous plunge in value of troubled European banks, a step that some experts say could intensify fears and ratchet up risks of another financial crisis.

Belgium, France, Italy and Spain have decided to impose a temporary ban on short selling, beginning on Friday, according to a statement from the European Securities and Markets Authority released Thursday evening, after markets had closed.

Here’s how short selling works. See if you can wrap your head around this horseshit on a stick:

Assume you want to sell short 100 shares of a company because you believe sales are slowing and its earnings will drop. Your broker will borrow the shares from someone who owns them with the promise that you will return them later. You immediately sell the borrowed shares at the current market price. When the price of the shares drops (you hope), you “cover your short position” by buying back the shares, and your broker returns them to the lender. Your profit is the difference between the price at which you sold the stock and your cost to buy it back, minus commissions and expenses for borrowing the stock. But if you’re wrong, and the price of the shares increase, your potential losses are unlimited. The company’s shares may go up and up, but at some point you have to replace the 100 shares you sold. In that case, your losses can mount without limit until you cover your short position.

Shorting stocks is big scam and drives down otherwise healthy stocks because investors make money when a stock price goes down. In other words, it a form of investment in which the lower a stock price goes, the more money is made by investors. So if short-sellers descend on a stock, the price will go down regardless of the health of a company. One of the many reasons the stock market sucks.

Adding… Eric Cantor is doing this with government bonds. He makes money when bond prices sink.

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  • http://www.politicalruminations.com/ nicole

    It boggles the mind that we allow practices such as short selling. It makes no sense, especially in a world where the ripples so rapidly circle the entire planet.

    • http://rob.yurkowski.net/ Rob Yurkowski

      Even moreso, it boggles the mind that we allow practices such as Eric Cantor.

  • MrDHalen

    Wall Street and other financial markets around the world have become casinos for the ultra wealthy to gamble. The difference is people with 401k’s provide the House money and the players write their own odds. Then they hire MIT grads to create new and better games for them to play.

    • roscoe301

      The short seller doesn’t actually “borrow” shares. The person who “loans” his shares gets no recompense. If fact, the person who “loans” his shares is an unwitting accomplice to a theft of his own money.