Food for thought - on going short (that's a rhyme)!

I read somewhere the other day that there are accounts that ONLY allow you to go long in the market not short. I could not figure out why this was until I picked up a little ‘pearl of wisdom’ the other day on Bloomberg (TV) (they sometimes do have their uses).

What I gathered from the conversation (interview) was the fact that allowing people to go short actually messes with the real underlying information or market value of a stock. In other words - when there is a HUGE stock selloff - like there has been in the past couple of days - this is not necessarily due to those companies doing badly - but because we are able to short sell the stock - it becomes a self fulfilling prophecy i.e. the moves downward start - then trigger a whole bunch of shorts at certain places - and this then accelerates the drop - until it gets to the next bunch of shorts - and the acceleration increases and so on and so forth - basically until the market runs out of shorts to hit. Going long is not the exact opposite of going short from what I gather i.e. as the true value of the stock increases so does the price.

Did I understand this correctly (John - rhodytrader)??? If not - then why are there certain accounts that only allow a person to go long - not short the stock? The one I read about is called a 401K account or something like that - whatever that is???



shorting a stock is a vary complex way to trade stocks. the conciept is crazy. Lets sell something we don’t have and at a later time we will buy it back and not end up owning it. I think that for this reason most brokers will not let your simple investor short sell. Another problem is that when you short a stock and it goes down you lose money but you have nothing that you own. Collateral would be the closest word I can think of. This is a concept that I have tryed to figured out and I just learned to accept “because” for an answer.

You do realize that if you go short in forex or futures you’re do exactly the same thing, do you? Forex is a little more complicated because you’re dealing in pairs, but the concept is the same. You sell something you don’t own in expectations that it will go down so you can buy it back later and make a profit.

A 401k account is like an IRA account (both retirement accounts in the US). As such, there are restrictions on what they can be used to trade. Anything that is generally considered “risky” (like shorting, options, futures, etc.) are oftentimes not permitted. The idea is that they are intended for conservative investing, not speculation. Take that for what you will.

Not all stock traders are permitted to short in their normal brokerage account either, though. Shorting requires a margin account. In the stock market - unlike futures, etc. - shorting means borrowing the stock from someone who owns it and selling it, eventually to buy it back and return it to the owner.

As for shorting messing “with the real underlying information or market value of a stock”, that’s nonsense. The ability for traders to buy and sell is how market value is formed.

Take a minute to really think about that ‘shorting turning into a self-fulfilling market decline’ scenario. I’m not saying it’s can’t happen, but can’t the exact same thing happen in terms of buying? The answer is most definitely yes. It happens all the time. That’s what the late 1990s was!

The difference between stocks and forex, though, is that there is a finite amount of stock available. There are only so many shares to buy, or to borrow and short.

From the Master! Thanks John.