ok . I don't short....mainly because I don't feel confident...

ok . I don't short....mainly because I don't feel confident doing so, secondly because I have always looked upon it as a negative process....

However, I received an email discussing short selling and, in particular the recent ban on the practice, from the mailing list of Dr Alexander Elder. Some of you may be familar with Dr Elder, but for those who aren't, he is the author of several trading books,including one of my favourites "Sell and Sell Short". Which I might add, is not exclusively concerned with the short position.


It's quite long but I will paste it here. I think it's a great evaluation and the best explanation I have read:

The Idiocy of a Shorting Ban

The government, in its infinite wisdom, has outlawed shorting a long list of stocks. I believe this misguided rule has hurt exactly those bulls whom our desperate politicos were trying to help.

Short-sellers are to the stock market what wolves are to the forests. I am sure that rabbits and deer, especially the slow or sick ones, would love to see wolves outlawed, shot or poisoned. But we know that without the wolves the animal population would become sickly. The wolves take the weakest animals, and the herd becomes healthier. Markets without shorts are more likely to rise to unrealistic heights and develop bubbles which then burst, hurting everyone.

Shorts provide a unique power of support for falling prices in bear markets. When a stock is in a free-fall, bargain-hunters hang back, waiting for the drop to end. The shorts are the first to step in to buy falling stocks. When I am short a stock, a sharp decline creates a grand opportunity to book profits. Buying by short-sellers cushions declines and attracts bargain-hunters.

Let us keep in mind that there is good and bad shorting.

When a private trader wants to sell short a stock, he or she borrows those shares. This is why I maintain trading accounts at different brokerages: if broker A does not have the stock I want to short, I can go to broker B or C. Occasionally, shares are unavailable, preventing me from shorting a stock about which I am bearish. This is how normal shorting operates.

On the dark side, there are trading companies that take advantage of the fact that shorted shares do not have to be delivered for a few days. They can hammer a stock with massive short sales, not bothering to borrow shares in the first place. When the delivery date arrives, they close their positions, and then a new wave of 'naked shorts' comes in because unethical people tend to operate in packs, conspiring to attack a stock. I saw an interview with the CEO of a company whose shares had been attacked this way. At the peak of the campaign the short position exceeded the total number of shares issued by the company. That is not shorting - that is a crime.

The government would help the markets if it rooted out 'naked shorts' who play fast and loose with our stocks. It should let those of us who legitimately sell short continue to do what we do best: gently deflate overvalued stocks and provide support below the market by covering our shorts during market declines, making them milder and softer.