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Why is it not enough when all private investors just loose their money if it turns out this company is worth much less that they hoped and payed for? What would

Why is it not enough when all private investors just loose their money if it turns out this company is worth much less that they hoped and payed for? What would it add when a short-seller makes a profit on the loss of the investors who took on the risk trying to create a business. Who would pay the shortseller's profit? In general, I think all derivatives should be taxed the equivalent of casino tax, because that's what it is: betting in a zero-sum game for society. Of couse we know that betting provides very good predictive information, but that does not seem like a good reason to treat financial betting different from other form of gambling.

saryant 11y ago
The profit for shorts provides an incentive to correct the market regarding overvalued or fraudulently valued companies. That's a good thing.
troydavis 11y ago
To your question of "Who would pay the shortseller's profit?": in most cases, shorting a stock isn't causing more cumulative loss[1]. There's no additional "payment" or transferred gain. Shorting lets the market incorporate the collective doubt earlier than it could otherwise, but it's the same "payment" (share price change). One could make a strong argument that shorting prevents some shareholders from taking a much bigger loss. Some shareholders would have purchased in this hypothetical run-up that short sales would soften. When "it turns out this company is worth much less that they hoped and payed for," those shareholders would lose more because the difference between what they paid and what it's worth would be larger. That's particularly true for the quintessential long-term retail investor who fundamentally believes in the company. That person is likely going to own it until the company's product is proven or disproven, and the fluctuations in between aren't going to affect them (other than as above, if they bought at an inflated price). Shorting also creates an incentive for skepticism. One could argue that, if Theranos' technology doesn't work, making it harder and more expensive (dilutive) for them to raise money is a service to society. [1]: an arguable exception is shorting solely to make other investors lose confidence (rather than due to a negative view of the company). However (a) that's not the case here, (b) often it's actually the undiscovered seed of a real issue (someone has to be first..), and (c) shorting enough of a stock to meaningfully depress it is much, much tougher to do than it sounds, since the short investor will need to purchase/repay shares at some point, the possible exposure when they do is unbounded, and they'll need capital to cover their unrealized loss in the interim. This is not a trade anyone takes lightly.

saryant 11y ago

The profit for shorts provides an incentive to correct the market regarding overvalued or fraudulently valued companies. That's a good thing.

troydavis 11y ago

To your question of "Who would pay the shortseller's profit?": in most cases, shorting a stock isn't causing more cumulative loss[1]. There's no additional "payment" or transferred gain. Shorting lets the market incorporate the collective doubt earlier than it could otherwise, but it's the same "payment" (share price change). One could make a strong argument that shorting prevents some shareholders from taking a much bigger loss. Some shareholders would have purchased in this hypothetical run-up that short sales would soften. When "it turns out this company is worth much less that they hoped and payed for," those shareholders would lose more because the difference between what they paid and what it's worth would be larger. That's particularly true for the quintessential long-term retail investor who fundamentally believes in the company. That person is likely going to own it until the company's product is proven or disproven, and the fluctuations in between aren't going to affect them (other than as above, if they bought at an inflated price). Shorting also creates an incentive for skepticism. One could argue that, if Theranos' technology doesn't work, making it harder and more expensive (dilutive) for them to raise money is a service to society. [1]: an arguable exception is shorting solely to make other investors lose confidence (rather than due to a negative view of the company). However (a) that's not the case here, (b) often it's actually the undiscovered seed of a real issue (someone has to be first..), and (c) shorting enough of a stock to meaningfully depress it is much, much tougher to do than it sounds, since the short investor will need to purchase/repay shares at some point, the possible exposure when they do is unbounded, and they'll need capital to cover their unrealized loss in the interim. This is not a trade anyone takes lightly.