A Sure Sign A Country Is Headed for a Crash

...when they ban short-selling.  As a response to economic problems, banning short selling is roughly equivalent to banning criticism of the government during a political crisis.  Or perhaps more accurately, its like trying to improve poll results by not polling people with negative opinions.   Short-selling has utility for the actual traders involved because it helps them achieve whatever financial or risk-management goals they might have.  Short-selling has utility for the rest of us because it allows the full range of opinions to be expressed about the value of a particular company or asset.  Nothing in a market economy is worse than having prices that have no meaning.

6 Comments

  1. joshv:

    I think they should just ban selling. Much more effective, if you can't sell, the price can't change.

  2. Bram:

    So if short-selling is banned, how will the confident people buy-long?

  3. Ken:

    Bram, you can buy long from a seller who already owns the stock.

    In the U.S. you can still short any Spanish stock that is listed on an American exchange. For example, I am short BBVA, a Spanish bank.

  4. tomw:

    From ignorance, I thought I had read of some Wall St firms that would pick a target, short sell it strongly enough to make its economic health questionable, then either drive it out of business, bankrupt, or re-purchase the shorted shares at a superb discount.
    How is it possible to differentiate punitive short selling from true price / value indicators?
    Thanks in advance...
    tom

  5. Bob Smith:

    How does short-selling make a company go bankrupt? What you do to its stock doesn't affect the basic business of the company. Now, if the company is stupid enough to secure its debt with its stock, and then gets slammed by a margin call, that's a different matter entirely.