Shorting the Market, Why did they create them?

Question

Why are we aloud to short the market and be able to bet on the market of a stock or an ETF to go down? Did they do this because they knew that the stock market was going to crash?

Answer 1

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Answer 2

I think you have some great answers from the other posters.  But I didn't see too much about the history of shorts, and I think part of you question dealt with that.  So here's a link to read up on the history of shorting:

http://en.wikipedia.org/wiki/Short_selli...

Answer 3

Who are they? Why did "they" create sub-prime mortgages? In financial markets you will always get some bright spark who will think up some "clever" idea, that's why the market is so fascinating. If you did'nt have shorting you wouldn't have bear squeezes!

Answer 4

The stock market does go down. However, when you short a stock you are borrowing the stock from a big bank, with the idea that the price of the stock will go down in the near future, allowing you to repay the stock for less. Big banks have these and make money off of you buying and selling them. It is very risky and not recommended. In the end, they still get the same number of shares back. Read the Intelligent Investor.

Answer 5

Shorting or puts and calls provide liquidity to the market.  It allows you to make money with the market going up, down, or sideways.  It is a necessity to allow people to bet on the up or down to provide an efficient market.

Think of a craps table with a pass line (long on stocks) and don't pass line (short).

Answer 6

If people were only allowed to go long on stocks, then some stocks could get pumped up to ridiculous prices.  Short sellers put some downward pressure on overpriced stocks, keeping prices reasonable and preventing ordinary people from getting ripped off.

Answer 7

Bob's answer I'd say is best for a description of the purpose of shorting in preventing overbuying.

As for its creation shorting has exsisted in some form or another since the 18th century (long before anywhere outside of europe has a bourse).

Relevant to your question:

Since last summer the rules in place including NASD rule 3350 and SEC10a-1 have been eliminated.  These rules prevented what are nicknamed bear raids by only allowing a short possition to be assumed if the stock had "ticked" up. ie you could only short in a bull run hence preventing you driving down the price. Uptick rules have been in place since 1938 to prevent traders from crashing markets through "unruley practises" seen in 1929.

The SEC has been looking at eliminating the rule for over 5 years to prevent returns of bubbles like the dot com bubble in the late 90s.

The elimination did come at an odd time however it was apparently not deliberate to allow profiting from the enevitable market downturn that came with the start of the credit crunch. The SEC insists that it eliminated at that time as that is when it had finished its tests. The tests showed that there was no difference on market behaviour with or without the rule.

It has however had the upside of allowing short sellers and short ETF to realise profits. I mean the down turn has not so far been terrible by any standards. we're only down 1500 points on the DOW 10%ish that could even be considered a correction rather than a bull market due to is brief period or constant decline.

The people most at risk are those who are not willing to wait this out. The banking and financials might not recover to the same levels for a long time but there inherent value has not been there for a long time. Look at the level of leverage in these stock and you will see that prior to the downturn they were simply overleveraged.

This was simply a bubble (overvaluing on hype). Same as the late 90s with people buying new tech companies on 20x earings with only 2 years of accounts.

If you invested wisely then when the recovery comes after the end of the year or so then you will see your money back. Look at the steel producers and the fertilizer producers. although overbought at present they have recovered very quickly from the shorting and fear of the christmas period as their fundamentals are still solid. good leverage, and growth on the back of expanding markets. That is value. not botched balance sheet on hyped products which is what drove the credit bubble.