• Skip to primary navigation
  • Skip to main content
  • Skip to footer

866-878-9209

support@topdogtrading.com

  • Facebook
  • Instagram
  • Twitter
  • YouTube
Top Dog Trading

Top Dog Trading

  • Home
  • About
  • Reviews
  • Products
  • Blog
  • Member Login
Contact Us

Is Short Selling Stocks Un-American, or Does It Save America?

I still remember the first time I heard about short selling stocks. I knew all about buying stocks. And I knew that after you bought them you could sell them. But it never occurred to me that you could sell them BEFORE you bought them!

The concept took a little while to get my head around.

As I discussed this new (to me) concept with other investors and traders, I soon discovered that many people feared short selling stocks and the idea made some people mad as they accused anyone who would short a stock as “un-American” because they are “betting against American business.”

For some reason, shorting never bothered me. It didn’t feel scarey and it didn’t strike me as unpatriot. On the contrary it made perfect sense that people should be able to participate in the market whether it is going up or down. To only be able to invest to the upside seemed rather limiting and naive … but I was certainly in the minority in that opinion.

First let’s address the issue of what short selling stock actually is. It can be very confusing to someone new to the markets who have been taught to buy low and sell high.

Actually, shorting the market is still buying low and selling high. It’s just doing it in the reverse order: First sell high, then buy back low!

But the mystifying aspect to most is: How can you sell before you buy?

Actually what you would normally be doing is borrowing the stock (since you didn’t buy it first), then selling it so you you can buy it back later at a lower price (and then return the shares to the lender).  There is also a fee for this “borrowing.”

While that may sound complicated, it’s a fairly simple process with many brokers and can be executed with the simple press of a button (assuming you have meet all the requirements of your broker and the stock is available for shorting).

You can also short Futures which have been historically more friendly to short sellers than the stock market.

One objection is that shorting is more risky than buying because if you buy a stock your risk is limited to the stock going down to zero. But if you short, there is no limit how high the stock can go against your position.

So, is short selling stock really evil?

Does it hurt the stock market?

Does it do damage to American business and our economy?

This is a perennial topic that seems to pop its head up most commonly during bear markets (for obvious reasons). And so as Washington is attempting to “clean up Wall Street,” the topic is back on the table in D.C. again.

One topic on the table: Restore the “uptick rule.” This rule was introduced during the Great Depression and required that a person could only short a stock if it moved up a tick before you shorted it. The intent was to curtail “bear raids” which could send the market crashing down. However at the time, the stock market moved in fractions. Now it moves in pennies and so the uptick rule has less effect as a move up or down by a penny is inconsequential.

It was only last September when the SEC attempted to curtail the bear market by such a policy. But they didn’t simply re institute the uptick rule, they actually implemented a temporary ban on the shorting of hundreds of financial stocks.

Did it work?

Look at where the market was in September 2008 and you’ll see that it wasn’t too successful at holding the market from going down further. Whether it saved some of those financial institutions from going out of business may be another question.

Short Selling Stock

Sometimes investors get overly excited and pump up markets beyond their true value. We’ve seen this with real estate, financial institutions, technology and even tulips!

While it is good to maintain some balance, and it is certainly possible for the market to go to extremes up or down, short sellers provide a valid role in the markets by helping to apply pressure against the infamous “irrational enthusiasm” we’ve experienced in various markets over the years. And if they don’t prevent it, at least they play a role in bringing markets back to their fair value eventually.

That’s my opinion.

What’s yours?

Leave your comments below.

Current Market Analysis,  Day Trading,  Forex,  Investing,  Stocks bear market,  Investing,  recession,  short selling stocks,  stock market,  stock market for beginners

Reader Interactions

Comments

  1. Raji says

    April 15, 2009 at 2:13 am

    I feel better now because I too was confused about short selling. I’ve never done it but I have not ruled it out.
    Of course its a good thing, what goes up must come down, why not make some money in the process.
    Thanks for the freebee Barry!

    Reply
  2. Joe Zolin says

    April 15, 2009 at 2:33 am

    G’day Dr Barry,
    Historically, as you point out, every time short selling has been banned or the uptick rule enforced, the markets have in fact fallen.

    This does certainly beg the question as to the validity of the rule.

    I do note however, that there tends to be a “popular” backlash during these times of market falls with some quite strong antagonism against “dirty Shorters” popping up in stock market forums.

    ‘Tis interesting though that the detractors go quiet when one points out that if in a “Long Only” strategy, any sell is the equivalent, meaning a person against shorting should never sell, and also anyone with a long only strategy who sells to buy back at a lower price is effectively doing the same as “Naked Shorting” except they actually own the stock rather than borrowing it. the effect is the same though.

    Appreciate your blog.

    Joe

    Reply
  3. steve b says

    April 15, 2009 at 3:48 am

    The only time i have a problem with short selling is when i am invested in shares of a company. My buying puts upward pressure on the market prices which is what i want. If my broker then collects a commision by lending my shares out to a third party who sells them there’s a conflict with my intentions.

    Brokers which offer the lowest commision rates are the most likely to do this so read the fine print. Here in australia we had a broker go bust recently where the fine print said that the people buying the shares didn’t actually own them. The low commision rates didn’t lessen the pain for OPES clients when they went bust.

    steve

    Reply
  4. John Bishop says

    April 15, 2009 at 4:57 am

    Reinstating the uptick rule will be virtually useless in preventing short positions unless the restrictions include banning all forms of short selling.

    The environment has changed significantly since the last time we actually had an uptick rule in place:
    1. Decimalization of stock prices have made markets more efficient with the concurrent ability to get an uptick for only .01 price improvement (vs. 0.125 price improvement under fractional pricing).

    2. You can get short by selling calls, buying puts, or selling single stock futures.

    3. You can get short by buying inverse ETF’s (like SH).

    The above being said – I believe disallowing short positions is harmful to the market in general as it makes the markets less efficient overall.

    To the average investor it doesn’t matter if a stock went down because a short seller shorted it or because it was simply overinflated due to a lack of sellers willing (or able) to enter the market.

    It basically comes down to whether you believe the process of price discovery is better served by allowing all participants to express their opinion or by attempting to keep a segment of the market from participating.

    On a humorous (and skeptically sarcastic) note, I have noticed that only a few months ago the government was blaming speculators for high oil prices. Since oil prices have come down so precipitously recently, shouldn’t we be thanking short sellers of commodities for helping boost the economic recovery?

    John

    Reply
  5. KT says

    April 15, 2009 at 6:36 am

    I agree with your comments on short selling and I think the game in DC is just standard politics to make it look like they are doing something and that they know what they are doing. I suspect the average politician does not know the difference between short selling and naked short selling. Naked short selling is the mechanism used for causing real damage to businesses. Naked short selling is illegal and all politicians need to do is encourage the SEC to enforce their own rules. That would be the patriotic thing to do.

    Reply
  6. Jake says

    April 15, 2009 at 8:15 am

    Short sellers are the only ones paying taxes this year. They help america to build roads and bridges. They also help pay teachers police and firemen. They help pay for our service people abroad. Short sellers keep money in the system and keep america strong.

    Reply
  7. Anthony D'Auria says

    April 15, 2009 at 8:16 am

    Providing they limit the use of naked short selling and somehow protect the little guy from being inundated by the gigantic Hedge funds there may be a reason to short. My experience is that in a completely free market the guy with the most money wins in the short run. When you short a stock it immediately is driven up by the short speculators and when you buy the opposite occurs. The guys with the most money have a distinct advantage.

    Reply
  8. Scott Haynie says

    April 15, 2009 at 9:45 am

    Ever wonder what the common big picture is on ALL speculative marke climaxes?

    I had a theory that the U.S economy has basically been bubble hopping since it’s inception. Recovery times vary and lenght and size of bubbles vary but there is a common trait besides the nebulous investor entheusiasm.

    it’s the expansion.. often rapid expansion of money. usualy through credit. This goes back to Tulips and beyond. At the height of tulip mania they wre circumnavigating money creatin laws by creating personal credit notes. the futures market was created inadvertantly also. The height of the Tulip mania so people paying for tulips that didn’t exist in money that didn’t exist.

    Most other market crashes that I’ve looked into share this trait. They start from a legitimate market move that is fundamentaly valid and investors start to pile in and rationalize incredibly new heights. This is common to all speculator literature and seems to be true.

    what is less common in the “trading books” is the attention paid to expanding money and credit.

    Just thougth it was interesting and wanted to share it.

    Reply
  9. Linda says

    April 15, 2009 at 12:19 pm

    I just wish they leave FNM and FRE alone. geez

    Reply
  10. Lane says

    April 15, 2009 at 12:57 pm

    If I borrow your car and sell it, It’s called fraud, even if I buy it back and return it. Would you voluntarily loan your stock to someone so they can drive the price down? The main source of shorting equities is market makers and stock specialists, they sell to the suckers at the top, and buy it back at the bottom, that is their purpose, it is called making a market. You have given these firms the ability to drive your economy into the dirt. So in this case we have exchange rules supercedeing our property laws, and market maker program terms supercedeing exchange rules, it’s the American method of funneling the funds of the many into the hands of the few.

    Reply
  11. Tim Brown says

    April 15, 2009 at 6:47 pm

    Short selling will always be a hot topic, however; price ultimately ends up being right regardless of which side that your on and an often overlooked fact is that short sellers often put support under a down trending stock, because they eventually have to become “buyers”.

    Reply
  12. Joe says

    April 16, 2009 at 1:26 am

    What a brilliant lot of comments! nice discussion.

    A couple of other points I’d like to make re the banning of naked shorts (I’m from Australia, so we can still do it here, barring financial stocks at the moment, and as someone above has pointed out, puts are still available).

    Firstly, the car analogy is cool, except, i am not actually driving around or otherwise using the scrip that might be my stock holdings, so a slightly off kilter example. Perhaps a savings account is closer where one “keeps” one’s hard earned, actaully enabling a bank to loan said money out (for a fee, the Interest you earn on the deposit) so they can make a further buck while you are not using your money. All which is above board and legal.

    Secondly, truth be known, and this IS a contentious issue, i would like to see the banning of “Naked Long Buying”…
    What is that may you ask? The idea of BORROWING someone else’s money, to buy something, with the expectation that you can then sell that something, and make a profit.

    Think Margin loans, leveraged instruments, or even outright borrowing to purchase shares.

    This is as heinous as some beleive “naked short selling.

    it creates inflation, bubbles such as our recent stock market bubble, credit crisis, expands the monetary supply (inflation again) and basically pushes out the little fellow, who only uses “real Money” that they own from being able to purchase.

    Unfortunately, I’ve never heard anyone get upset by this practice in the same manner as they get upset by naked shorting.

    Joe

    Reply
  13. Mark B says

    April 21, 2009 at 8:39 pm

    Good comments. I like the one about the those nasty short sellers driving down the price of oil. LOL.

    Regrarding the assumption that is is fraud for someone to borrow your shares to short. If you have a margin account, you have agreed to this practice and will get no compensation while the broker gets interest and commission. Read the fine print in the margin agreement. If you are a long term investor and this is an issue for you, then open a cash account.

    Naked long buying – hmm. Does that mean that someone else can double the amount of naked short selling? Or do the naked shorts and naked longs simply cancel each other out? Confusing.

    There is some truth to the point that a short seller is hoping that the company does poorly or goes out of business. But you have to also remember that the company is going south because of poor decisions and not just because some people have gone short. The employees will lose their jobs regardless of whether I am long or short or have no position. Enron, Fannie Mae, and AIG did not collapse because of short sellers.

    Reply
  14. Dan says

    April 23, 2009 at 6:11 am

    Short selling of stocks is different than that of commodities. In the case of commodities the additional liquidity and risk transfer ultimately benefits the producer and the consumer. With stocks there is no product except an organization that makes money. These are peoples lives at stake and at times all organizations go through money loosing periods, so to a degree we should want our stock market to allow time for pause and introspection.

    Commodities also always have some value, stocks can go to zero value simply based on the confidence of the market. So to a degree if we allow traders to create crisis in confidence we create opportunity for traders to destroy the very thing they are trading.

    Naked Short selling can be destructive to companies. Think about it a bit. Through an accounting gimmick naked short sellers create an economic hammer larger than the company itself. While it is rational to kill bad companies quickly, there is such a thing as too quickly and too sudden a death. Also a weapon of such magnitude can be misused.

    To me these questions are not simple in nature. Therefore the correct approach is to place your trust in the people who are the more powerful quants. In this case the exchanged, and the regulators who each have more power to understand this than you and me. And much more than any politician can understand. Therefore we should rally behind the conclusions of the quants who have studied this issue.

    Reply
  15. Tom Bailey says

    April 23, 2009 at 12:50 pm

    Be careful which securities to short.When holding shorts the seller is responsible for royalties such as dividends to stock holders. Shorting is taking a piece of responsibilty for that company’s liabilities towards that security.

    Reply
  16. Brian says

    May 3, 2009 at 11:20 am

    These are some excellent perspectives. From a historical standpoint, has the uptick rule prevented any market crashes? We’ve had several significant downturns in the market since 1934 like the late eighties and the dot com bubble etc. Was the uptick rule helpful then or during any other bears? It would be nice to have some facts to back up the relevance of the uptick rule in preventing any financial system or market crisis in the past.

    Reply
  17. nawaf asad says

    May 17, 2009 at 1:16 am

    Hi Dr
    i d like to thank you for all the education that you ve given me . you made me a better trader . a trader in control . i dont chase markets anymore i let the market come to me

    Reply
  18. Manny Aparicio says

    May 17, 2009 at 3:30 pm

    Dear. Mr Burns.

    Thank you for your generosity and providing all this great info. I have incorporated some of your strategies into my trading and have done well.As
    always I appeciate your hard work.

    Good Trading,

    Manny

    Reply
  19. Steve says

    May 17, 2009 at 6:11 pm

    Hi Barry, Only just seen your Videos and I feel more encouraged. Been Trading 7 years made all the mistakes you can make.I get ahead then give it back
    Made a heap on Options and gave it back,I used to wait for “All the Ducks to Line Up” so to speak but I always waited to long. You have given me a new insight.
    Thank You

    Reply
  20. Jay says

    May 18, 2009 at 2:57 am

    Dr. Burns

    Another great video, Thanks for the teaching
    tools… They really help.

    Reply
  21. Chun li says

    September 29, 2010 at 7:27 am

    I follow your weblog for quite a extended time and must tell that your content articles often prove to be of a high value and quality for readers.

    Reply
  22. Herbert Colke says

    August 18, 2011 at 6:31 am

    Why don’t you discuss the hedge funds of from 3 to 10 TRILLION DOLLARS EACH moving the market as they wish???

    Reply
  23. Mika says

    September 10, 2012 at 4:46 am

    Below is just a little information on short selling from my small unique book “The small stock trader”:

    Short selling is an advanced stock trading tool with unique risks and rewards. It is primarily a short-term trading strategy of a technical nature, mostly done by small stock traders, market makers, and hedge funds. Most small stock traders mainly use short selling as a short-term speculation tool when they feel the stock price is a bit overvalued. Most long-term short positions are taken by fundamental-oriented long/short equity hedge funds that have identified some major weaknesses in the company. There a few things you should consider before shorting stocks:

    • First of all, you want to short stocks when the market sentiment is negative (in the bull market most stocks go up, and in the bear market most stocks go down);
    • You should also look for changes, besides an expected profit taking, that may trigger a stock price decline, such as massive insider selling, a lower-than-expected earnings report, profit warning,a dividend cut, etc.
    • Beware of short squeezes and takeover bids (small caps are more vurnerable);
    • Check the short interest (ratio) and its trend;
    • Be quick (stock prices decline several times faster than they rise);
    • Cut the losses short and don’t average down your losing short positions to avoid being caught up in a cross fire of a Volkswagen short-squuezelike scenario;
    • For longer tern short positions, one of the best candidates to short are the former leaders, big winners, close to the top of the bull market, as these same winners of the last bull market usually fall the hardest in the next bear market. Early–cyclical stocks are also good candidates to short in the beginning of bull/bear markets.

    Despite all the mystique and blame surrounding short selling, especially during bear markets, I personally think regular short selling, not naked short selling, has a more positive impact on the stock market, as:

    • Short selling leads to better price discovery;
    • Short selling increases liquidity, which in turn narrows the bid/ask spreads;
    • Short selling may also serve as a hedging tool or a pairs trading tool;
    • Short selling provides profit opportunities in bear markets;
    • Short sellers are a counterforce against upside-biased insiders, stock analysts, investment bankers, stockbrokers, stock investors, and creditors.

    Lastly, small stock traders should not expect to make significant profits by short selling, as even most of the great stock traders (Jesse Livermore, Bernard Baruch, Gerald Loeb, Nicolas Darvas, William O’Neil, and Steven Cohen,) have hardly made significant money from their shorts. it is safe to say that odds are stacked against short sellers. Over the last century or so, Western large caps have returned an annual average of between 8 and 10 percent while the returns of small caps have been slightly higher.
    I hope the above little information from my small unique book was a little helpful!

    Mika (author of “The small stock trader”)

    Reply
  24. Kay says

    September 30, 2012 at 10:50 am

    Valuable information. Lucky me I found your site by accident, and I
    am shocked why this accident did not happened earlier!

    I bookmarked it.

    Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Free Trade Strategy!

Get my favorite trade setup called "The Rubber Band Trade" on day 4 of this free 5-day Video Mini-Course: "Make Money by Breaking Every Day Trading Rule You Ever Learned".

Footer

Top Dog Trading

866-878-9209

support@topdogtrading.com

8939 S. Sepulveda Blvd, STE 110-111
Westchester, CA 90045

Sitemap

  • Home
  • About
  • Reviews
  • Products
  • Blog
  • Member Login

Company

  • Terms of Service
  • Privacy Policy
  • Risk Disclosure
  • Best Stuff
  • Reviews

If you do not agree with the terms of this disclaimer, please exit this site immediately. Please be advised that your continued use of this site or the information provided herein shall indicate your consent and agreement to these terms.

These results are based on simulated or hypothetical performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated or hypothetical trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

The information contained on this site is for informational and educational purposes only. We are not registered as a securities broker-dealer or as investment advisers, either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice. Trading and investing involves substantial risk. Financial loss, even above the amount invested, is possible and common. Seek the services of a competent professional person before investing or trading with money.

Neither the information contained on this site, nor in any other place, is provided to any particular individual with a view toward their individual circumstances and nothing on this site should be construed as investment or trading advice. Each individual should assume that all information contained on this site is not trustworthy unless verified by their own independent research. There is a substantial risk for loss when trading securities as they are highly susceptible to the risks and uncertainties of certain economic conditions. For all these reasons and others, your use of the information provided on this site, or any other products or services, should be based upon your own due diligence and judgment of how best to use the information, and subsequently independently verified by a licensed broker, investment advisor or financial planner.

Any statements and/or examples of earnings or income, including hypothetical or simulated performance results, are solely for illustrative purposes and are not to be considered as average earnings. Prior successes and past performance with regards to earnings and income are not an indication of potential future success or performance. There can be no assurances of future success or performance and we will not be responsible for the success or failure of any individual or entity which implements information received from this site.

We do not imply, predict, or guarantee that you will be successful in earning any money whatsoever. If you rely upon any figures or information on this site, you must accept the risk of substantial trading losses.

Past results of any individual trader are not indicative of future returns by that trader, and are not indicative of future returns which may be realized by you. Neither the author nor publisher assume responsibility or liability for your trading and investment results. This site and all information therein is provided for informational and educational purposes only and should not be construed as investment advice. The author and/or publisher may hold positions in the stocks, futures or industries discussed here. You should not rely solely on this Information in making any investment. You need to do your own independent research in order to allow you to form your own opinion regarding investments and trading strategies.

It should not be assumed that the information in this website will result in you being a profitable trader or that it will not result in losses. Past results are not necessarily indicative of future results. You should never trade with money you cannot afford to lose.

The information in this site is for educational purposes only and in no way a solicitation of any order to buy or sell. The author and publisher assume no responsibility for your trading results. There is an extremely high risk in trading.

This information is provided “AS IS,” without any implied or express warranty as to its performance or to the results that may be obtained by using the information.

Factual statements in this site are made as of the date the information was created and are subject to change without notice.

Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.




  • Facebook
  • Instagram
  • Twitter
  • YouTube

Copyright © 2007–2025 Top Dog Trading. All rights reserved. Return to top