is it a hold or a sell?, page-46

mithril - re "The reason the reduced buyer count argument isnt correct is because the shorter is a guaranteed buyer sometime in the future and he pays the borrow costs plus dividends for getting this privilege of delaying of buying stock back.". What you say is correct, namely that at some time in the future everything will go back in balance, but in the meantime the market is distorted for reasons I will explain (again)...

re "to short a stock you must must first borrow it then onsell it. You end up paying a stock borrow costs and any dividends the stock pays. It can get pretty expensive pretty quick. Not every stock falls like qbe.". I agree with the last part - that shorting is expensive if you get it wrong. It's the first bit that's the problem. Let me explain in a bit more detail: Company X issues one share. Investor A buys it. Investor B is interested in owning an X share, and to do that he/she needs to agree a price for buying it off A. That's how the market works. But now gambler C borrows A's share and sells it to B. A and B now between them own two X shares, yet the company only ever issued one.

It's not all bad for everyone - for example B may benefit by getting a lower buy price - but it's not good because for the duration of the short A is disadvantaged if he/she does want to sell. ie, the market has been distorted by the removal of a buyer.

re they "place a synthetic short on the market". No problem, that is also in the derivatives market, not the primary market.