Consider: what would happen to stock prices if short selling were outlawed?
The exact same thing as the price of everything else? People would pay what they were willing to pay for them, and sell them at whatever price they thought was reasonable?
I don't need to have short sellers promising to sell me a stereo for $1000 at some point in the future while they wait for it to drop to $900 so they can make a profit on the sale any more than I need a scalper to helpfully buy a bunch of tickets to events and mark them up so that I can't buy one myself.
Okay, let's say I don't own stock in XYZ corp but I've done my research and have reason to believe they're really dropping the ball. I believe the stock is overvalued, and I want to express that belief. Without the ability to short sell there would be no way to do that; no way to signal to other market participants (and society at large) that the price is too high.
I think maybe you're underestimating just how HUGE a problem that is. It means market pricing *cannot *accurately reflect the true valuation of a company. Accurate valuation (insofar as that is possible) is perhaps the most important product of a free market in that it allows capital to be directed most efficiently and protects people from paying the wrong price.
Continuing our example, let us say that my speculation is correct and XYZ really is overvalued. The corporate officers almost certainly understand that and so they decide to issue more shares at the inflated price. People who buy those shares are really screwed. Capital will be badly allocated because there was no way for the price to accurately reflect all known information about the company. Badly allocated capital is a negative for all of society.
any more than I need a scalper to helpfully buy a bunch of tickets to events and mark them up so that I can't buy one myself.
Let's say your dastardly scalper buys all the tickets to an event for an average of $50 a piece and manages to sell them all at an average of $100 a piece.
Now, this is getting long so I'll just leave you with a couple of questions. First, what is the real value of those tickets? Second, can you see what the downsides are of the tickets selling at the wrong price?
The exact same thing as the price of everything else? People would pay what they were willing to pay for them, and sell them at whatever price they thought was reasonable?
I don't need to have short sellers promising to sell me a stereo for $1000 at some point in the future while they wait for it to drop to $900 so they can make a profit on the sale any more than I need a scalper to helpfully buy a bunch of tickets to events and mark them up so that I can't buy one myself.
Okay, let's say I don't own stock in XYZ corp but I've done my research and have reason to believe they're really dropping the ball. I believe the stock is overvalued, and I want to express that belief. Without the ability to short sell there would be no way to do that; no way to signal to other market participants (and society at large) that the price is too high.
I think maybe you're underestimating just how HUGE a problem that is. It means market pricing *cannot *accurately reflect the true valuation of a company. Accurate valuation (insofar as that is possible) is perhaps the most important product of a free market in that it allows capital to be directed most efficiently and protects people from paying the wrong price.
Continuing our example, let us say that my speculation is correct and XYZ really is overvalued. The corporate officers almost certainly understand that and so they decide to issue more shares at the inflated price. People who buy those shares are really screwed. Capital will be badly allocated because there was no way for the price to accurately reflect all known information about the company. Badly allocated capital is a negative for all of society.
Let's say your dastardly scalper buys all the tickets to an event for an average of $50 a piece and manages to sell them all at an average of $100 a piece.
Now, this is getting long so I'll just leave you with a couple of questions. First, what is the real value of those tickets? Second, can you see what the downsides are of the tickets selling at the wrong price?