Question

In your view should short selling be banned? Provide evidence to support your answer.

Answer 1

Meaning of Short Selling:-

In simple words Short Selling means sale on a thing which seller does not own.

Short selling is also used to hedge value of investment.

In market speculators sales shares/commodity which does not exist in its portfolio at higher price and then expect to buy it back at cheaper price for settlement of transaction.

Example:-

Mr. A borrow share of company X from its broker at price $100 and sale it in market at same price, when price of company X drops to $ 90 he purchase the share and give it back to its broker. Through these transactions Mr. A earn $10 profit per share.

Short Selling should be banned due to following reasons:-

1. Hidden big risk at very little margin:-for short selling trader requires only margin money in its account by which he can borrow stock from its broker. This margin money does not how big risk trader going to purchase by this trap many become bankrupt.
2. Unlimited Loss: - If prediction does not match with expectation and market move in opposite direction with rapid speed than many times it become race for life because in this case there is no limit for loss. Traders require giving back stock to broker at any cost.
3. Mere Speculation:- Many times there is no base or calculation on which this short selling is dependent . Speculation is banned in many countries but governments has provided license to do speculation in share market.
4. Artificial Movement in market:- Short selling create artificial movement in market which does not show true picture of value of company or market. This way it is harmful for company, market and economy. Bear Stearns was a good example of this.
5. Unethical: - Selling something without owning it is unethical. Earning money by such a way indirectly discourages peoples to earn money by work with honesty.

For all those reasons explained above it should be banned.