To Short or Not to Short: Is the act of selling stocks short ethical?

The recent Gamestop stock-trading frenzy has highlighted the investment strategy of selling short stocks, or shorting stocks. This practice can cause massive economic repercussions for the companies whose stocks are being sold. With this in mind, it’s time to revisit the question of whether the act of shorting stocks is ethical. 

When someone shorts a stock, they borrow shares of a company’s stock and then sell those shares for the market price. As opposed to buying stocks which bet that a company’s shares will increase in value, shorting stocks bet that a company’s shares will decrease in value. Once short sellers are content with their investment, they purchase the shares and return them to their owner. The margin of profit is the amount between the price they sold the shares for and the price they bought them back for. However, there is a great deal of risk involved with shorting stocks because there is no limit to how much a stock can rise, and thus, if selling short fails, an investor can find themself at a much higher deficit. 

While investors may face consequences for failing at shorting stocks, the companies whose stocks are being sold short will also encounter trouble. As investing guru and parent at the School Patrick Lin articulated, “if [a company being shorted] needs to raise money, it prevents them from being able to do so. If they are unable to raise money, it will [inevitably] harm their operations.” 

Recently, the giant hedge fund, Melvin Capital, made headlines when they attempted to sell short GameStop’s stock. GameStop, a company already on life-support from the pandemic, could very well have gone out of business if not for thousands of Reddit users who successfully executed a short squeeze, or an attempt to block people from shorting a stock by buying that same stock to increase its value. However, shortly after the squeeze, the popular trading app, Robinhood, prohibited users from investing in GameStop to help their largest customers: the hedge funds who had shorted the stock. 

Put simply, Robinhood and the hedge funds that pressured the company to stop users from trading GameStop stock should be ashamed of themselves. The Reddit users deserve just as much of a right to economic freedom as the billion dollar hedge funds. For a company that claims to “democratize Wall Street,” catering to the every whim of the billion dollar firms trying to put GameStop out of business seems incredibly hypocritical. 

We can take away a lot about shorting stocks from these events. While the act of selling short has become an essential part of the market as a whole as well as the process of valuing a stock, it is unacceptable to use aggressive and manipulative tactics like blocking a short squeeze to profit. Until this precedent is established, the debate of whether selling short is ethical will remain wide open.