2

Seems like a no-brainer? I guess if your security is not marginable, it can't be bought long on margin either, but I would also guess for most companies there are more margined shorts than margined longs.

Is it due to listing requirements? Or are they just not devious enough?

  • Why would a company care if their stock can be shorted or not? – Vitalik Dec 6 '10 at 22:58
  • It makes your share price go down, which reduces your ability to raise money by issuing additional shares. Also, management often get stock or options as part of an incentive package. They care a lot. – John Shedletsky Dec 6 '10 at 23:04
  • 4
    Shorting does not necessarily lead to the stock price going down. – George Marian Dec 6 '10 at 23:07
  • 1
    right. shorting doesn't drive the price down. when you sell (short or not), somebody buys. All short sale means is that you sold the shares you don't have. The broker actually borrows it from somebody's account. The company doesn't know whether you sold your own shares or borrowed. – Vitalik Dec 6 '10 at 23:20
  • 4
    Short-selling is too often maligned. Remember that if you've ever bought a stock, short-sellers helped make sure that it wasn't overpriced. (People somehow magically forget this when they're looking for a scapegoat as to why a stock is in the toilet - which is usually because it stinks and not because of market manipulation.) – fennec Dec 7 '10 at 3:56
6

Vitalik has mentioned this in a comment but I think it ought to be expanded upon:

Companies that aren't already penny stocks really don't stand to gain anything from trying to prevent short interest. Short selling does not inherently lower the stock price - not any more so than any other kind of selling. When somebody shorts a stock, it's simply borrowed from another investor's margin; as long as it's not a naked short resulting in an FTD (Failure To Deliver) then it does not add any "artificial" selling pressure.

In fact, shorting can actually drive the price up in the long term due to stops and margin calls. Not a guarantee, of course, but if a rally occurs then a high short interest can cause a cascade effect from the short "squeeze", resulting in an even bigger rally than what would have occurred with zero short interest. Many investors actually treat a high short interest as a bullish signal.

Compare with margin buying - essentially the opposite of short selling - which has the opposite effect. If investors buy stocks on margin, then if the value of that stock decreases too rapidly they will be forced to sell, which can cause the exact same cascade effect as a short interest but in the opposite direction. Shorting is (in a sense) evening out the odds by inflating the buying pressure at lower stock prices when the borrowers decide to cover and take profits.

Bottom line is that, aside from (illegal) insider trading, it doesn't do businesses any good to try to manipulate their stock price or any trading activity. Yes, a company can raise capital by selling additional common shares, but a split really has no effect on the amount of capital they'd be able to raise because it doesn't change the actual market cap, and a dilution is a dilution regardless of the current stock price. If a company's market cap is $1 billion then it doesn't matter if they issue 1 million shares at $50.00 each or 10 million shares at $5.00 each; either way it nets them $50 million from the sale and causes a 5% dilution, to which the market will react accordingly.

They don't do it because there'd be no point.

  • 2
    Yes. Manipulating your stock price is lame; a healthy company doesn't have any need to do this, and it will raise red flags. Trying to fool the market is generally fairly ineffective in the long term. – fennec Dec 7 '10 at 4:01
  • By your argument, the reverse should also be true: going long should drive the price down in the long term. That's not something I've ever heard of. – John Shedletsky Dec 7 '10 at 17:52
  • 1
    @John: I explained that in my answer. Long buys can drive the price down if they're on margin. Short sells are always on margin. I also never used the word "should" and you should refrain from using it as well; nothing can be accurately predicted to the level of "should" in the stock market, margin buys and short sells are just two of many factors. – Aaronaught Dec 7 '10 at 20:17
  • If short selling has no effect on stock price, what is the rationale for the Uptick Rule? I remain unconvinced. – John Shedletsky Dec 8 '10 at 1:10
  • 2
    @John: The uptick rule was eliminated three years ago because analysts found that (not surprisingly) it didn't actually do much other than cause volatility through decreased liquidity. The campaign to reinstate it is largely political, espoused by non-experts with minimal understanding of the stock market who like to blame the short sellers whenever they lose money on an investment. Even so, the original purpose was simply to prevent bear raids and other types of manipulation and fraud; the notion that short selling lowers a stock price below its fair value is just wrong. – Aaronaught Dec 8 '10 at 1:43
3

I do believe it comes down to listing requirements. That is getting very close to penny stock territory and typical delisting criteria. I found this answer on Ivestopedia that speaks directly the question of stock price.

Another thought is that if everyone were to do it, the rules would change.

The exchanges want to promote price appreciation. Otherwise, everything trades in a tight band and there is little point to the whole endeavor. Volatility is another issue that they are concerned about. At such low stock prices, small changes in stock prices are huge percentage changes. (As stated in that Ivestopedia answer, $0.10 swing in the price of a $1 stock is a 10% change.)

Also, many fraudsters work in the area of penny stocks. No company wants to be associated with that.

  • I take issue with this "The exchanges want to promote price appreciation. Otherwise, everything trades in a tight band and there is little point to the whole endeavor." – John Shedletsky Dec 7 '10 at 17:45
  • The exchange has no control over appreciation, and in this case, appreciation would happen through splitting. – John Shedletsky Dec 7 '10 at 17:45
  • @john How exactly would appreciation happen through a stock split? Assuming that we accepted this idea, is an exchange's allowance for such a practice not promoting appreciation? – George Marian Dec 7 '10 at 20:22
  • 2
    @john However, in that scenario, you end up with 20 shares priced at $5 each. You have an increased number of shares, however their overall value has not changed. – George Marian Dec 8 '10 at 4:13
  • 6
    @John: I don't understand why you're being argumentative. George is exactly right; a stock split or reverse split does not change the value of your position at all. A 2:1 split means you end up with twice as many shares, each valued at half of the original price. – Aaronaught Dec 9 '10 at 0:54
0

A stock split can force short sellers of penny stocks to cover their shorts and cauuse the price to appreciate. Example: Someone shorts a worthless pump and dump stock, 10,000 shares at .50. They have to put up $25,000.00 in margin ($2.50 per share for stocks under $2.50). The company announces a 3 to 1 split. Now the short investor must come up with $50,000.00 additional margin or be be "bought in". The short squeeze is on.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.