As a result of the evolution of Grifols' price, short selling has taken on a new role. It is worth analyzing what it consists of, its consequences and also its legal and ethical dimension.
The most common way to invest in stocks is to select companies that are considered to be worth more, either because they are priced too low or because they have good expectations. The investor believes that in the future these shares will be worth more and his investment will be profitable. Deciding which companies to invest in is not easy; requires analyzing the situation of the company and its future prospects.
Short selling is an operation opposite to that described. The short seller detects a company that he believes has an overvalued share price and, therefore, believes that it will fall in the future. So what he does is sell the shares, but he doesn't have them and therefore he borrows them, usually from a stockbroker, with the idea of buying them cheaper in the future. With an example it is better understood: suppose that the price of a company's shares today is ten euros and that the short seller believes that they should be worth six euros. If he sells them today for ten euros and delivers the shares in a few weeks when they are worth six euros, he will earn four euros per share, that is, he earns 40% in a short period of time.
Short selling has advantages and disadvantages. Among the advantages we can highlight that they make bearish investors intervene in the market. Therefore, operations increase and stock brokers generate more activity and commissions. And if the bears are correct in their diagnosis, they can make their bet profitable. But they also have negative effects. Since money is fearful, if short selling is accompanied by negative news that has been exaggerated (or that is half-truths or outright false), prices fall more than the affected company deserves and, in addition, volatility increases. . And when stock prices fall, it can have a contagion effect and can hurt the overall economy.
These types of operations are legal. They are provided for in current regulations and are common internationally. But it is also worth asking if they are ethical operations. Ethical behavior means acting by doing good. The distinction between good and evil depends on each person's values. If the predominant value is to make money at all costs, then no problem. If our values include making money with companies that are doing well so that they do better, then short selling is more debatable.
I personally believe that the economy and markets would function better without short selling. In fact, there have been times when they have been prohibited so as not to increase stock market volatility. Cruyff said that beyond the result you had to win “nicely”. Making money with short selling, in my opinion, is not a “pretty” way.
