Ecxellent, the old 'Shorters are anti-christs' debate - here's one I prepared earlier - 8/7/02 to be precise.
I note your points about shorting etc but still fail to comprehend why it should be important or valuable to any degree in the stock market.
It is both important, valuable and necessary.
The stock market plays two important roles:
1. It provides a vehicle through which a company can raise money with which to expand their business with the ultimate goal of rewarding those that have put money into that company.
2. To provide a base around which other financial products - for example pensions - have the ability to generate earnings for the benefit of thier clients.
As an aside to these two fairly important areas a whole structure of financial 'dealing' has been created, all with the primary idea of creating wealth for those that want to try to improve the returns they get on their money.
To enable these companies to make money in varying market conditions various methods have been created to allow them to profit in both rising and falling markets - one such method is to be able to sell stock by 'borrowing' it from and existing owner (for a charge) and then returning it when it is bought back in. If shorting was not allowed then the market would quickly stagnate and the whole financial business collapse along with the share prices of the companies in which you have your investments.
Consider the current state of the worlds stock markets - it is a nightmare, confidence is shot to hell. If there was no way that an investment company could leverage its stock holding through either lending the stock out, or writing options against it, then they would sell at the first sign of trouble - it would be the only 'safe' thing for them to do - along with everyone else. The volatility in the marketplace would be horrendous, and many investors - private or institutions - would simply go to the wall. At worst case, each time a company came out with a statement saying that they were having a hard time, they would be dropped like a hot stone - the risk is heightened as the choices of dealing with that risk are diminished. It would be like switching a light on and off.
So, although shorting itself certainly isn't important when considered on its own, it is certainly an important part of the overall gearing and leveraging process that is the utilisation of the stock market as an investment (or gambling) forum. I believe (wrongly or not) that shorting actually helps to control and dampen volatility in the markets, whilst maintaining liquidity - without it, and the other associated derivatives, you would have a stagnant (illiquid) market prone to huge swings on good or bad news (volatility).
The knock-on affects of this would be seen at a personal level in pension, insurance, interest rates, cost of living - frankly everything you can think of. At company level, the affects would be even worse - would you 'invest' in stocks under those kind of conditions? - switching from boom to bust at the drop of a hat.
As a result companies wouldn't be able to expand, wouldn't be able to raise capital - other than through private investment - but then where would the private investors get their money? The banks wouldn't be willing to take risks - they would have no way of hedging that risk. Employees wouldn't see pay rises and what extra they did have would have to be kept back because their pensions don't grow......
I'm sure you can work out the picture. The stock market is not just about playing with your extra cash, it affects just about everything we do in some way, if you want to curb some of the methodologies and techniques that have grown around the stock market (and every other market) then you are stifling liquidity and generating volatility, which frankly is a perilous route.
I invest: stock market ( pension investment trusts and insurances )
You are allowing someone else to do the gambling for you - these pension companies and insurance companies are probably the major share holders that are offering stock to lend. Some have rules that prohibit selling for a period of time after buying, others are prohibited from going short or offering stock to shorters.
In which case not only are you giving your money (and demanding a good return) to those that may perhaps practice this dispicable act of shorting (do you know if they do or not?), but even worse, perhaps you are tying your money up in an investment vehicle that cannot take advantage of a bear market, but are compelled to hold stocks and not cash - thus putting you money at even higher risk.
Shorters are the least of the problems about at the moment - companies not making money and overall confidence in the stock market is by far more worrying - it is stuff that depressions are made of.
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Since then that markets have bottomed and risen, bu the argument remains solid.
What is worrying is the current reduction in trading ranges in the past year (since the 'bottom'). Here is a spreadsheet with the some of the indices with their average monthly range per year.
http://www.thetradepit.com/tbs/ranges.xls
Thsi shows the affect of 'climbing a wall of worry' - the classic initial recovery stages of markets. As these ranges tighten, speculators move out of the market as it becomes more difficult for them to make money (I've given up on FTSE for the first time in 6/7 years - I'll go back when I have evidence that it is worth trading again).
This is not good for the markets, reducung liquidity and therefore increasing volatility.
so just do what they please it seems like.....
