Is Short Selling Ethical? Arguments for AND Against


Short sales are a type of contrarian trade where an investor makes money when the price of a stock drops. For many, short-selling is counterintuitive. It goes against the grain of ethical logic to profit when someone else loses. So is short-selling ethical?

Short selling is just as ethical as any other type of for-profit enterprise. However, the questionable behaviours that some short sellers engage in to help drive prices down definitely cross the line of some ethical codes.

Naturally, the pessimistic concept of hoping a company will fail will make short-selling a hot topic for ethical debate. It is always an interesting discussion and one where both sides can make a strong argument. Keep reading for a detailed breakdown of the arguments for and against short selling as an ethical practice.

The Ethical Implications of Betting Against a Company’s Stock

As with any type of ethical debate, there is no clear-cut right, wrong, yes, or no when it comes to short selling. Is short-selling ethical? Well, it depends.

The practice itself is not any less ethical than traditional investing. Stocks either go up or down, so why is it less ethical to believe that the price will go down? It isn’t so much unethical as it is counterintuitive to the way most investors think.

Short selling gets unfairly pigeonholed as unethical because it seems unkind to hope that a company will fail. Typically, the thought is that a business opens to fill a need in the community. Short sellers betting against that business are essentially seen as people going against the grain of cultural and economic advancement.

It just seems a bit sinister, if we can put it that way. Even if the intentions are not, which they usually aren’t.

There is also a tendency for some short sellers to “short and distort”. This basically means that the trader enters into a public smear campaign to spread negative sentiment against the stock to fuel further price drops. Much of this can involve spreading rumours and statistics not based on any type of facts. Always be careful where you get your investing advice!

While I think we can all agree that this type of short-selling behaviour is unethical, is it really any less ethical than buy-and-hold traders who misrepresent a company’s financial statements to make it look like it is stronger than it is to fuel ongoing price spikes?

So at the end of the day, it can be said that short selling itself is not unethical, but the behaviours that accompany short selling often are. But the same can usually be said about any type of for-profit business practice.

Arguments FOR Short Selling as an Ethical Investment Practice

The arguments for short selling as an ethical investment practice are numerous. Some of the most prevalent pro-short-selling arguments include:

  • The financial markets are capitalist enterprises. If you see an opportunity to make a profit, then go for it. 
  • As long as it is your money, nobody has a right to tell you how to deploy it. 
  • Nobody owes public companies their investment dollars. They knew the risk involved when they listed. If investors don’t believe in them, they have the right to act upon them.
  • Short selling puts downward price pressure on stocks, making them more accessible to average buyers. Therefore, short selling returns stock prices to a more fair market value.

Finally, the most compelling argument for short-selling is that it can help keep unethical companies in check. If a trader sees a company that they know to be cooking the books, is fraudulent in the type of products it is putting out, or has toxic leadership, then it could be considered more reasonable to drive that company’s price down.

Arguments AGAINST Short Selling as an Ethical Investment Practice

Like the arguments in favour of short selling as an ethical investment practice, the list against it is also quite long. It just seems a little easier to immediately demonize short selling as unethical:

  • The notion of betting on a company to fail is a little difficult for most people to swallow. A general precept of capitalist economies is that people should be rewarded with profit for their efforts, so betting and hoping that the company will struggle just seems a bit evil.
  • Most people’s futures are tied up in mutual funds, 401Ks, ETFs, and other types of stock-based portfolios. As short selling puts downward pressure on these investment products, the idea that short sellers are actively trying to diminish returns is highly unsavoury to the average person.
  • Most investors casually contribute their funds to the market using a buy-and-hold approach. They have a bit of a naive belief that their investments will appreciate over time. Short sellers are viewed as much more savvy investment “sharks” who use their in-depth knowledge of the markets to capitalize on the beliefs of the masses.
  • Many short-sellers profit from short-term drops in a stock’s price. They sell high, buy low, and close their trade. Any activity that is seen as nothing more than a way to “make a quick buck” is usually met with scorn, as it goes against the concept of working hard, contributing what you can, and building success over time.

All in all, while there are many arguments for and against short selling as an ethical practice, it is the general sense of pessimism necessary for a short trade to be successful that makes it a scapegoat for ethical zealots. 

Viral News Stories on Short Selling

Anyone who has tried to build a traditional investment portfolio took a punch to the gut in 2022. Most asset markets are in the midst of their worst bear run since the burst of the housing bubble and the ensuing financial crisis of 2008.

Many people nearing retirement age are having to remain in the workforce as their nest eggs have crumbled, while many new investors are deep in the red.

However, short sellers were up as much as $114 billion earlier in the year, placing huge winning bets against companies like Tesla and Netflix. In addition, short sellers continue to bet against popular consumer stocks in the belief that an economic recession is imminent. 

In short, while millions of people are hurting in the midst of mind-boggling inflation and reductions in their retirement savings, short-selling sharks continue to line their pockets. 

Is Short Selling Ethical? The Bottom Line

The practice of short selling is no less ethical than any other type of for-profit enterprise. It is the practice of unfairly smearing companies to fuel a price drop that can make short sellers cross the line of ethical boundaries.

With that said, the general pessimistic concept of hoping a company will fail strikes a nerve with some people, so be sure to comb through all of the key talking points above to develop your understanding of whether or not you think short selling is ethical.

Thanks for checking this out, we hope you learned a thing or two about short-selling!

Geek, out.

Noel

Noel is the founder and main contributor for his blog - Noel's passion for personal finance has helped him amass over 600k readers to his Financial Geek blog.

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