Most writers will look at the title of this blog and wonder if I’ve finally lost it.

Short-selling stocks? Really?

People read this blog because they write and are interested, curious, or amused by my frequent diversions into the ethics of writing. “Who cares?” is the likely first reaction. The second is to scroll down to see if there’s something to this diversion.

Unlike fiction, it’s impossible to start with ethical norms on this subject. First, you have to explain “short selling” because less than a single handful of writers will have ever sold anything short. We sometimes sell ourselves short, but that’s a subject for another blog. Short selling is one of those things finance majors learned about in college while writers were studying grammar and style. Explaining it prompts an ethical inquiry.

Unlike “regular” investors, short sellers first sell at a high price and then buy the stock back at a lower price. They sell stock initially that they do not own. Not only is short selling characterized by a negative stigma, its practitioners make money while other investors see their holdings drop. To buy stock does not call for ethical inquiry; it is the benefit of the bargain. The buyer wants to buy a particular stock. The seller wants to sell it. They agree on a price. Viola, the stock is sold.

Selling short can create an ethical dilemma. Some professionals in the stock market believe that it causes significant market declines and occasional stock market crashes. While there is no specific evidence that short selling is influential in this regard, some traders say it’s unethical. What your fellow traders think matters. It’s an institutional ethical norm.

Technically, short selling is premised on market rules that allow traders to borrow a stock from an investor, immediately sell it, and hope that its price will fall so that it can be repurchased later at a lower price. The sellers make their profits on the price decline. At that stage, it is returned to the original shareholders, who receive fees for their participation in the scheme or the transaction, depending on whether you’re the seller or the buyer.

Others in the stock market biz see the question not in ethical terms but rather as an assessment in how traders behave when prices rise or fall. That calls for the question of what an ethical dilemma is, exactly. Philosophers say an ethical dilemma is a difficult choice that must be made between two courses of action, either of which entails transgressing a moral principle. That’s an ethical norm. Do not do things that put you into an ethical dilemma. Instead, ask yourself this simple question before the market opens in the morning: are we buying, selling, or going fishing?

Gary L Stuart

I am an author and a part-time lawyer with a focus on ethics and professional discipline. I teach creative writing and ethics to law students at Arizona State University. Read my bio.

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