Is Shorting Ethical ?

[aca_trader]

By the way, shorting is disallowed in USA except on 'upticks'. Maybe some day we will have that rule in India.

AGILENT

I wish that day is never in India. It creates hinderance in the way markets should play and in any case it was a Knee jerk reaction to the 1929 crash rather than a well-thought off strategy.

In USA, after a certain level of fall in Indices, only upticks are allowed. Another responce to fighting crashes. Do u think it's a justified measure?

Best Regards,
-Ashish

 

[pkjha30]

A good, succint response to the question, indeed.

Shorting is entirely ethical and in fact allowed by RBI in intraday trade of Govt Secs, for example

However, shorting can sometimes be unethically executed (see link)http://www.investopedia.com/university/shortselling/shortselling4.asp

By the way, shorting is disallowed in USA except on 'upticks'. Maybe some day we will have that rule in India.

AGILENT

Hi agilent

This was a new information for me. That simply means that in USA shorting is believed to be a way of manipulating the market to the detriment of large number of people and hence illegal. May be this should be followed in India.

Pankaj

 

[aca_trader]

Hi agilent

This was a new information for me. That simply means that in USA shorting is believed to be a way of manipulating the market to the detriment of large number of people and hence illegal. May be this should be followed in India.

Pankaj

Pankaj!

We need not emulate USA in everything. Something are better left to the preachers and mind u preachers only of the free markets.

 

[Saint]

I make this post because I see many boarders showing a sympathetic attitude to a falling market and making a villain out of a correction or even a short term bear trend whereas the fact is that it is the markets way of flushing out the excesses of the previous move. No market can remain in a bull or bear trend forever.

Is shorting stocks ethical?

Some people claim that shorting stocks is un-ethical because they are contributing to the stock price going down. This is nonsense, and equally illogical is the fact that shorting is not allowed in our markets except intraday and fno. Remember that after you short a stock, you then have to buy it back! This creates buying pressure on the stock.

Short sellers slow the rapid decline of a stock by buying to cover on the way down. If the short sellers were not involved in the stock, it could plummet into a very rapid decline; ( Imagine only sellers and no buyers? Also, short sellers can be caught in a "short squeeze".

There is nothing wrong with shorting. It's just part of the mechanics of the stock market.

I think it is essential that a trader learn to short stocks. Buying stocks is only half of the equation! If the market in general is in a downtrend, you are not going to want to be buying stocks and attempt Hara Kiri. So in order to make any money you need to learn the art of shorting.
Sometimes you can make money faster by shorting than by buying. Why? Because stocks typically go down at a faster rate, then when they go up! Fear appears to be much more powerful emotion than greed.

The general public thinks that if a stock goes up, then this is "good". If a stock goes down, then this is "bad".

Wrong! It depends on which side of the market you are on.

I think Dalal Street really doesn't want the public to know about shorting stocks. In a bear market, market professionals on TV talk about how "horrible" the market is to encourage investors to sell.

They are shorting stocks and profiting all the way down...

Great write,Vince,as always........

Saint

 

[Agilent]

Hi agilent

This was a new information for me. That simply means that in USA shorting is believed to be a way of manipulating the market to the detriment of large number of people and hence illegal. May be this should be followed in India.

Pankaj

Not quite, Pankaj, its not shorting per se which is illegal there, but shorting on downticks.

See the logic:
Responding to concerns over short-selling, the U.S. Securities and Exchange Commission (SEC) instituted an uptick rule in reaction to the Crash of 1929. The rule provides that a short seller cannot sell a stock short unless on an uptick or a zero-plus tick; this means the stock can only be sold short if the last non-zero "tick" (i.e. trade price) was higher than the preceding one. In doing so, U.S. market regulators are trying to make sure that short sellers are not, by themselves, causing the price depreciation, and that downwards pressure on the stock price is balanced by new buying demand.

In theory this rule will help in smoothening out the price decline which attracts shorts in the first place

Who knows, the massive volatility we are seeing these days (today's unabated fall pre-rally, for example) could be reduced if we have that rule here

Views?
AGILENT

 

[pkjha30]

Hi Agilent

Thanks for clarification though I understood the point that it was allowed on upticks and not on downticks. Quite clear and logic is also simple. I don't know how effective it would be as movements are not in one direction but could be upticks or downticks. Not very difficult to manage, if one has finacial muscle to do that.

I just searched for Market meltdown and came up with this interesting article.

http://www.financialsense.com/fsu/editorials/2005/0525a.html

It had this to say while concluding

The other day, one of the talking heads on CNBC stated that one of the largest brokerage houses was recommending that retirees sell naked puts to increase their income from their investment portfolios. Heaven help those who took that advice!

In his 2002 Berkshire Hathaway letter to shareholders, Warren Buffett had this to say, “We try to be alert to any sort of megacatastrophe risk, and that posture has made us unduly apprehensive about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

Naked puts are potential uncollateralized receivables that could wipe out entire brokerage firms and those individuals choosing to sell them for income. Their magnitude is beyond anything I have ever seen before. On May 13th, those playing Russian roulette in the market found that the chamber was empty. Will the same happen for the June options expiration?

And then this disturbing fact

from http://www.int.iol.co.za/index.php?click_id=3&art_id=qw1148291100209B253&set_id=

Indian police are watching out for possible suicides by brokers and investors after a steep market slide wiped out billions of dollars in share values, officials said on Monday.


In the 1990s, a stock market meltdown led to several bankrupt brokers and small investors committing suicide across India, some of them drowning in rivers or throwing themselves off high rises.

I don't know what else is ethical, giving tips or shorting. I have no opinion of my own as of now, but any situation including that of farmers' suicide needs hard look from the society and also the authority.

But , just imagine, if market is driven to 3000 or to 25000 by 9th June 2006 in BSE(sensex) what do you think should be done?

Regards
Pankaj

 

[Agilent]

Hi Agilent

But , just imagine, if market is driven to 3000 or to 25000 by 9th June 2006 in BSE(sensex) what do you think should be done?

Regards
Pankaj

Pankaj,
Not sure I followed you. Can u pl elaborate ...
Thx
AGILENT

 

[pkjha30]

Pankaj,
Not sure I followed you. Can u pl elaborate ...
Thx
AGILENT

Hi agilent

It is only hypothetical. We call it worst case scenario.
Sensex at 3000 in two weeks is worst case for investors or those who go long.

Sensex at 25000 in two weeks is worst case for Short sellers.

Though appears unlikely. But what could be the reaction or what do you think should be done in such a situation given the ramifications will be far wider than could be imagined.

Pankaj

 

[Agilent]

Hi agilent

It is only hypothetical. We call it worst case scenario.
Sensex at 3000 in two weeks is worst case for investors or those who go long.

Sensex at 25000 in two weeks is worst case for Short sellers.

Though appears unlikely. But what could be the reaction or what do you think should be done in such a situation given the ramifications will be far wider than could be imagined.

Pankaj

Come now Pankaj, in either case, whats the problem?

Havn't u heard of stop losses, and margin calls. My sense is : the vast majority of members of this forum (typically day traders) maintain stop losses, and the majority of them (thanks to close hand holding by expert traders) probably know when and how to change positions .... swing traders you know .... so in fact if they are lucky they should make money in either of the worst case scenarios you envisage.

What say ...
AGILENT

 

[jdm]

if buying with borrowed money is ok why not selling with borrowed stock. as long theres no manupulation everything should be ok.