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Rekenthaler Report

Should Shorting Stocks Be Illegal?

The question is not rhetorical.

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The Plaintiffs’ Case
Usually, my headlines are, ahem, rigged. As did Socrates, I ask the questions knowing where the answers will lead. (The comparison between us ends there.) Today’s column is different. In response to Friday’s installment, many readers advocated banning the practice of shorting. This article addresses that suggestion, while containing no preconceived notions. I have no horse in this race.

We’ll start by defining the proposal’s scope. One can profit from investment losses by: 1) shorting directly, 2) selling call options, 3) buying put options, 4) selling futures contracts, or 5) entering swaps. This article addresses only the first tactic, that of shorting directly, and only for individual stocks. Such a rule would not prevent investors from trading options on S&P 500 futures, selling Thailand White Rice contracts, or engaging in credit default swaps.

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John Rekenthaler does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.