I don’t claim to understand a great deal about the share market, and the current turmoil it’s enduring.
I’ve heard the practice of short selling explained twice on the TV or radio in the last few days, and while I think I get how it works, I can’t understand why the owners of the shares involved would agree to it, if they know it drives prices down… but I assume there must be some explanation.
As for naked short selling — well, I know I’m missing something there, as how one can make use of a something without possessing it is beyond me.
All in all, my layman’s view, based on minimal information, would be that short selling and naked short selling sound like dodgy practices that are odd things to be a part of the global economy. In fact the whole share market seems to be like a stack of cards… which is now toppling.
The big US government bailouts are interesting. It was very amusing to hear Derek Guille on 774 note that it was “pleasing to see the Neocons embracing socialism”.
What does this all mean to the person in the street? Well, I got my annual superannuation statement the other week. It had a cover note that basically urged people not to panic about losses on the markets, and emphasising that in the longer term, growth has been strong. I turned over the page to find that my retirement fund has dropped by 20% in the past 12 months.
Oh well, if the bailout is what’s being done, I hope it works.
7 replies on “I don’t understand the sharemarket”
The thinking behind all of it is: “in the long run, people doing crazy stuff will be sorted out by the market and they’ll have their arses handed to them on a platter – so why not charge them for it in the meantime?” Assuming those guys are around to pay the interest on their borrowings (of shares).
Which assumes that markets don’t snap under stress, which has historically been shown to happen, and in an attempt to drive the point home is being shown to happen right now. At some point, people will learn that free markets only go so far, and they’re not perfectly symmetric – bankruptcy laws prevent what goes around from coming back around.
On a slight tangent to the topic . . .
A book (www.americantheocracy.net/TOC.html) came out two years ago predicting that the global supremacy of the US was already in/about to go into decline and looked at oil, religion and finance as both indicators of it being on a slippery slope and forces which could ultimately lead to its demise. He based this on how past super powers (Spain, Holland, Britain) had similar experiences and trajectories.
Since then, peak oil has begun to bite and this whole financial mess (driven by sub prime mortgages and a voracious finance industry) has come to pass. The author was right on the money with the assertion that the finance industry has built a house of cards – at least in the USA. Interesting reading.
Unfortunately, most economists imbue their work with pro-right wing nonsense such as lowering taxes.
Share owners (lenders) allow their stock to be borrowed.
This allows the borrowers to sell the stock they have borrowed (Called Short Selling)
The big lenders in this game are the Super Funds as they generally have masses of stock sitting in trust gathering dust.
Therefore the borrowing process is merely an income generating scheme for said Super Funds.
Lending is never an issue during times of market appreciation, but when market and portfolio values decline, stock lenders gets their britches in a twist because the borrowers are making profits while the stock lender’s portfolio value decreases.
There are a number of pro/cons for short selling, but at the end of the day short selling isn’t the reason for market decline – investor sentiment is.
Short selling merely capitalises on negative investor sentiment.
Naked short selling is when you haven’t borrowed or don’t intend to borrow stock to cover a short sale. Whilst this is illegal, the fines are only $10,000 per offense, and hardly enough to stop the dodgy players from having a go.
The fine should be at least $100k
Check out the late economist Hyman Minsky’s “Financial Instability Hypothesis”
His once ridiculed theories are now gaining some credence in these times of banking turmoil.
I don’t understand the share market either. I know people who invest all their money in the share market and they lose it all. You would rather place a bet at the casino (joke). A few groups of very powerful greedy New York businessmen manipulate the market. When it is going down they all buy, when it is going up the sell sell sell.
Short selling and, worse, the entire derivatives market, are both just legalized gambling.
The moment we move past actual ownership of shares and into “options trading” and other similar practices we have disconnected wealth from value.
FORGET THE SHAREMARKET IRRELEVENT BULLSHIT-LOOK AT SHARES LIKE CVN WHERE REVENUE IN A 12 MONTH PERIOD EXCEEDS THE TOTAL SHARE VALUE OF THE COMPANY.THERE IS STILL PLENTY OF MONEY TO BE MADE YOU JUST HAVE TO LOOK A LITTLE HARDER.STICK TO SHARES FORGET THE EXOTICS WHICH NOBODY REALLY UNDERSTANDS.