Short selling – a must

It is funny how politicians react to a difficult situation. And the similarity and predictability of their reaction. When commodity prices go up, our great Chidambaram bans price discovery! A study can clearly show that the prices of goods are influenced by demand and supply. When demand for a product increases, price increases and when supply increases beyond demand price falls.

Now the great American senate has banned short selling. Short selling is an art and is necessary for the market to be as efficient. I remember in Jan 2008 having a conversation with a fund manager – as I have said earlier in my blog, I thought Tata Power, L&T, and HDFC were over priced. He agreed and said sell not only what you own, but also your neighbour’s  shares!

If I am an equity trader in the USA and I see some overzealous banker give a US $ 700,000 home mortgage to a guy earning $ 17,000 a year, the only thing I can do is to short the bank share! Thus short selling is a simple tool which helps at least some “irrational exuberance” guys not jumping up to the Heavens!

Do I like short selling? No frankly i prefer the put options, but for people who are not too happy using options, share loans and short selling should always remain open. People need to realise that only in a democracy can share markets thrive – you need to have 2 views. Or please go to China and create a facade of running a stock exchange.

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4 Responses to “Short selling – a must”

  1. Ravinder Makhaik on October 6th, 2008 at 12:52 pm

    A post on the functioning of the China Stock Exchange would throw some light on the remark “facade of running a stock exchange’.

    There is no dis-agreement over it but if you could illustrate it with some examples it could bring home the point in a more clearer way.

  2. When in a controlled economy some guy sitting in North block decided that India should build steel plants all institutions lent money to the steel industry. When the steel industry went into a recession, there were loan defaults.

    Now if the bankers lent only to the end user of the cars, the lender need not have worried about any particular industry.

    Allocation done by the capital markets is far more scientific than done by one man.

  3. Ravinder Makhaik on October 7th, 2008 at 11:50 am

    That does bring home the point but still a question rises —

    If the whims and fancies of China’s communist party run the show on Shanghai Stock exchange, how come so much of foreign institutional investors flock to buy up Chinese stocks.

    In a command economy they have successfully floated some of the biggest IPO’s in the world, though one may argue that most investments into China are by the expatriate Chinese community.

    Still the figures don’t add up.

    Borrowing your phrase, ‘may sound like a commie’ but is it that the political stability provided by the one party rule gives more security to investors in China than what India, one of the freest countries does.

  4. Wealth gets built only in a democracy. China may ban all those whose name starts with R and M. So u will suffer, i will be able to make money. In a democracy there is far more reason. So if you want to be wealthy, GET OUT THERE AND VOTE. Our democracy is very, very, very important.

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