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> The price of anything is a result of its some intrinsic value and the volume of supply. No. The price of a stock is the value of its discounted cash flows.

> The price of anything is a result of its some intrinsic value and the volume of supply. No. The price of a stock is the value of its discounted cash flows. Shorting creates synthetic shares, that guarantee the new longs an exactly replicated stream of cash flows. This doesn’t make the original shares any less valuable, because they still have the same cash flows. Imagine someone conjured a new company, called Tesla-2, out of thin air. It’s future profits and dividends exactly match Tesla. Why should this make TSLA any less valuable? If people are investing in TSLA for the company’s long term viability, the existence of TSLA-2 should be a good thing for holders of TSLA. Now they can buy even more. It’s only bad if people are buying TSLA as a speculative asset to flip to a greater fool. Which is why short selling is such an important mechanism to prevent speculative bubbles.[1] [1] https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2006.00868.x https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261....

mcherm 6y ago
> The price of a stock is the value of its discounted cash flows. Nearly. There ARE a few other reasons to own a stock, such as the right to influence the governance of a company. (I agree that shorting is an important market mechanism that protects against frauds and bubbles. I am much less sure that naked shorting provides value. In fact, I'm not sure I have ever heard an argument for why naked shorting is valuable... they always turn out to be arguments for why shorting is useful.)
JanSt 6y ago
You cannot reduce ownership of a stock to discounted cash flow. Owning shares (mostly) comes with shareholder rights like voting. To me it is pretty obvious selling more of those rights than exist is fraudulent.
- jameshart 6y ago
  In the simple short scenario, where A owns a share, lends it to B, then B sells it to C, the share in question only has one owner: C. A doesn’t have a share any more, they have an IOU from B for one share. B doesn’t have a share either. Only C has a share. Once the IOU comes due, B will need to acquire a share from D to give back to A, at which point both A and C own a share - but D no longer does. At no point are there any magic duplicated shareholding rights.
  - JanSt 6y ago
    Yes, but Gamestops was above 150% of float short. So that scenario doesn't matter and fraudulent stuff is going on. Shares were literally created from thin air.
- alisonkisk 6y ago
  Google did this exact experiment with GOOG and GOOGL. Voting is worth about 1-5% of the stock price. And you don't get extra voting rights for shorting (borrowing) a share. https://www.investopedia.com/ask/answers/05/shortsalevotingrights.asp https://www.investopedia.com/ask/answers/05/shortsalevotingr...
- fennecfoxen 6y ago
  Whoever lends shares to the short seller lends the voting rights attached to the shares as well, so as long as the short is covered, there's not actually any excess voting available. Moreover, sellers have up to two days to deliver the shares to begin with (the settlement period). If a naked short seller can secure the loan or the securities within that period, it all works out. (If they can't, well, it's fraudulent for other reasons more direct than the voting.)
  - JanSt 6y ago
    How does this work at 160% of shares shorted?
vladvasiliu 6y ago
This seems somewhat counter-intuitive to me. Could you maybe go into how creating a second company, Tesla-2, would have zero effects on the original Tesla's future cash flows and stock price? In my naïve view, TSLA's future cash flows have value because the company is expected to sell a lot of cars that: 1. No one else makes (or practically no one, such that TSLA has a majority of market share) 2. Many people want to buy. Now, supposing TSLA would be able to service all the demand for its cars, how would a competing TSLA-2, presumably offering identical cars (or of identical value at least) not affect TSLA's future cash flows? All things equal, if two companies sell products that are basically the same (same quality, price, etc), wouldn't that split the market in two? I wouldn't expect to see people buying twice as many cars because there are now two companies producing them.
- dcolkitt 6y ago
  Just to be clear, in the toy example, TSLA-2 does not compete with the original Tesla in anyway. They simply replicate the cash flows. Maybe TSLA-2 sells electric cars in a parallel universe. Or more likely maybe, it’s just a creditworthy institution who promises to match the profit stream, i.e. a swap.

mcherm 6y ago

> The price of a stock is the value of its discounted cash flows. Nearly. There ARE a few other reasons to own a stock, such as the right to influence the governance of a company. (I agree that shorting is an important market mechanism that protects against frauds and bubbles. I am much less sure that naked shorting provides value. In fact, I'm not sure I have ever heard an argument for why naked shorting is valuable... they always turn out to be arguments for why shorting is useful.)

JanSt 6y ago

You cannot reduce ownership of a stock to discounted cash flow. Owning shares (mostly) comes with shareholder rights like voting. To me it is pretty obvious selling more of those rights than exist is fraudulent.

jameshart 6y ago
In the simple short scenario, where A owns a share, lends it to B, then B sells it to C, the share in question only has one owner: C. A doesn’t have a share any more, they have an IOU from B for one share. B doesn’t have a share either. Only C has a share. Once the IOU comes due, B will need to acquire a share from D to give back to A, at which point both A and C own a share - but D no longer does. At no point are there any magic duplicated shareholding rights.
- JanSt 6y ago
  Yes, but Gamestops was above 150% of float short. So that scenario doesn't matter and fraudulent stuff is going on. Shares were literally created from thin air.
alisonkisk 6y ago
Google did this exact experiment with GOOG and GOOGL. Voting is worth about 1-5% of the stock price. And you don't get extra voting rights for shorting (borrowing) a share. https://www.investopedia.com/ask/answers/05/shortsalevotingrights.asp https://www.investopedia.com/ask/answers/05/shortsalevotingr...
fennecfoxen 6y ago
Whoever lends shares to the short seller lends the voting rights attached to the shares as well, so as long as the short is covered, there's not actually any excess voting available. Moreover, sellers have up to two days to deliver the shares to begin with (the settlement period). If a naked short seller can secure the loan or the securities within that period, it all works out. (If they can't, well, it's fraudulent for other reasons more direct than the voting.)
- JanSt 6y ago
  How does this work at 160% of shares shorted?

vladvasiliu 6y ago

This seems somewhat counter-intuitive to me. Could you maybe go into how creating a second company, Tesla-2, would have zero effects on the original Tesla's future cash flows and stock price? In my naïve view, TSLA's future cash flows have value because the company is expected to sell a lot of cars that: 1. No one else makes (or practically no one, such that TSLA has a majority of market share) 2. Many people want to buy. Now, supposing TSLA would be able to service all the demand for its cars, how would a competing TSLA-2, presumably offering identical cars (or of identical value at least) not affect TSLA's future cash flows? All things equal, if two companies sell products that are basically the same (same quality, price, etc), wouldn't that split the market in two? I wouldn't expect to see people buying twice as many cars because there are now two companies producing them.

dcolkitt 6y ago
Just to be clear, in the toy example, TSLA-2 does not compete with the original Tesla in anyway. They simply replicate the cash flows. Maybe TSLA-2 sells electric cars in a parallel universe. Or more likely maybe, it’s just a creditworthy institution who promises to match the profit stream, i.e. a swap.