The oil spill in the Gulf. Continuing problems throughout Europe. Correction in the stock market. Most shareholders hate events like this. But if you sell stocks short, you could be profiting from them. Is that a bad thing?
Few topics raise as heated a debate as short-selling. Some see it as an evil practice that threatens to destabilize companies or even entire governments. During the financial crisis in 2008, both Citigroup (NYSE: C ) and Morgan Stanley (NYSE: MS ) blamed much of their woes on short-sellers. Both Lehman Brothers and Bear Stearns were plagued by short-sellers before their respective demises. And giving short exposure to companies like Goldman Sachs (NYSE: GS ) via credit default swaps was largely responsible for the downfall of AIG (NYSE: AIG ) .
But many defend short-selling as an integral part of a functioning market system. It gives investors an incentive to spot bad businesses. Arguably, it makes surviving companies stronger by getting rid of inefficient competitors. Moreover, it can help stop unsustainable bubbles in fad stocks, from holey-shoe maker Crocs in late 2007 and early 2008 to PotashCorp and Mosaic, which rose to amazing heights before coming crashing down. Without short-selling, some argue, one-sided markets might never see the excesses that eventually bring weak companies back to earth.
Is short-selling for you?
As an investing strategy, short-selling isn't as familiar to many investors as buying stocks or mutual funds. That's why we've put together a series of articles looking at various ways to bet against the financial markets and individual stocks. By showing you the potential rewards as well as the risks, we hope you'll get the information you need to decide whether short strategies belong in your portfolio.
Here's our Foolish guide to the many things you need to consider when deciding whether to sell stocks short:
- Roundtable: Is Short-Selling Evil?
- Roundtable: How Fools Use Short Strategies
- Short-Selling: Is It for You?
- Should You Use Options to Go Short?
- Short-Selling Can Leave You Short
- Are ETFs the Best Way to Short the Market?
No matter whether short-selling makes your skin crawl or brings on dreams of avarice, take a look at the arguments for and against. Knowing more about short-selling is the best way to figure out whether using short strategies could save your portfolio.