The Value Of Short Selling – NMC Health

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There’s a view that short selling of shares should not be allowed. It’s merely speculation you know, does nothing productive to boost the economy. Well, actually:

NMC Health’s debts are more than double the level previously thought after advisers discovered an additional $2.7bn (£2.1bn) of borrowing that the company’s bosses said they were not told about.

The FTSE 100 hospital operator, whose shares are suspended from trading after a raft of secret loan guarantees were uncovered, said on Monday that some of the newly disclosed loans may not have been used for company purposes.

In the latest of a regular stream of stock market updates into its precarious finances, the Abu Dhabi-based company said: “In addition to $2.1bn group debt reported at 30 June 2019, the company has identified over $2.7bn in facilities that had previously not been disclosed to or approved by the board.”…

Oooops.

The point here being that this investigation was all triggered by a short seller. Who released a report shouting that the accounts of NMC Health were full of – well, full of what bedpans are used to collect.

As it turns out they were right. This is new information, we want people to be digging and finding such new information. If they get it wrong they lose money, if right then they make it. Excellent. But they can only make money if they are allowed to short sell.

Short selling thus provides the incentive for people to uncover corporate malfeasance. And, importantly, rather more money than the company can pay them to not uncover it.

Thus we find the value in allowing short selling – it makes markets more efficient by increasing the information available to them. And why wouldn’t we want that to happen?

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Spike
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Spike

In the US, if I hold a stock for less than one month, it is officially regarded as doing “nothing productive to boost the economy.” Likewise if I buy a stock and sell within 60 days including a dividend. Likewise if a computer makes many trades within a short time.

Using the numbers to decide if you should be rewarded or punished for acting “selfishly” is at the heart of the US tax code. It is senseless except to let the pol claim he is doing something. In fact, everyone in the market for any reason makes a better market.

TD
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TD

Isn’t most (if not almost all) short shelling a hedging technique as opposed to someone doing a ton of research and concluding that some stock is overvalued and then betting accordingly? Certainly I’m not opposed to either, but I’d expect that the type of short selling explained here is a bit of a niche.

Spike
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Spike

Hedging implies you have some interest, say, a business, that you need to protect from a fall in some price. An oil company hedges by buying contracts that pay if the price falls of the oil it produces; it sells its risk. You can short if you have no such interest; in that case it is purely a bet against the price of a stock. You can short with or without doing research. Short sellers (whatever their strategy) may spread information (true or false) that depresses the value of the stock.