Tuesday, March 17, 2009

Short-selling, credit default swaps and zero-sum gambling

Samantha Bee last night on the Daily Show shines a light on short selling:

Anyone want to tell me how/why short-selling is allowed? I've heard a defense of it as a mechanism for properly pricing stock, but it didn't make sense to me. Why can't potential buyers just look at the P/E ratios and other company fundamentals to decide what price they're willing to pay for a stock?

The short-selling is just another version of gambling, like the credit default swaps. This kind of gambling is zero-sum, isn't it? For someone to make money, someone else has to lose money, as far as I can tell. If I have that right, then that's what makes these vehicles different in kind from regular old ownership of a share of stock in a company. Sure, it's a gamble to own stock, in the sense that it could lose some or all of its value, but no one need lose any money for your stock to go up in value.

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