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Tuesday, September 07, 2010

A Short Margin

I ran a long series of rants against short selling a year back.

In the rants I forgot include one of my biggest complaints about the short sell.

One of the prime factors in our current economic instability is that our financial system is structured with far too much money in margin calls and not in direct investments.

A short sell is a margin play. In a short sell, the seller borrows stock and sells it. If I sold $10,000 in Google stock, I would have $10,000 deposited into my brokerage account. If I reinvest it, then I am in a margin position. If I leave it in the money market account, then others will borrow and re-invest it.

A company with short positions can actually get into troubles when the market collapses. To realize the gain from a short position, the speculator must buy back the stock, which means the investor would need to sell other securities.

The claim that short sellers temper overheated markets falls flat because of the fact that their short sells are inherently margin plays. If short sellers correctly called the top of the market, their short selling would flood the market with marginal loans that further distort the market.

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