Why did he say this?
To understand what Elon said, you need to know about GameStop.
GameStop is a US company that sells video games. They have over 5,000 stores across malls in the United States, Canada, Australia, New Zealand, and Europe.
It is a business that is on the way out. Kids buy their games online. And Covid has been a disaster for malls.
The smart money saw an opportunity and decided to short GameStop shares.
Short is the opposite of — you guessed it — long.
When you buy a share, you go long. When you sell a share (that you don’t own), you go short.
So how do you short something that you don’t own? Simple, you borrow the share and sell it.At some point you will need to buy the share back and return it.
Back to our story
Some people saw what the smart money was doing. These were small investors who discuss investment ideas online. They decided to take the opposite trade and went long GameStop.
And in this tug-of-war between the small online investor and the smart money, for a change, the small guy won. Yay! The share price went up and the smart money had to exit their trade at a massive loss.
In all this excitement, some folks like Elon, began to say that short selling should be illegal.
Elon is not alone. On my WhatsApp group of IIMB classmates, some echoed similar feelings. It is interesting that the champions of the capitalist system, of free-markets, would say this.
Elon is biased
Elon is the richest person in the world (as of this moment, anyway). And his fortune is built on Tesla.
Tesla is widely seen to be overvalued. It sells a fraction of the cars compared to competition. But is valued significantly higher.
And so no surprise, Tesla has been a keen target for short-sellers. It is another matter entirely that short-sellers have time and again burnt their hands, and money, betting against Tesla/Musk.
As you can now understand why Elon does not like short-sellers.
Elon is wrong
Elon’s tweet is an exercise in false equivalence. He is comparing apples to oranges. Shares are not houses and cars.
Having said that, property developers sell houses they have not built yet. And they do it with bank loans and advances from buyers. This has its own set of dangers. As I said, apples and oranges.
Elon is not alone.
Short-selling is non-intuitive. It makes people nervous. Historically, governments did not allow short-selling.
In the world of complex financial instruments, you can trade two types of options: calls and puts.
Simplistically, call options allow you to buy, put options allow you to sell.
In 1973, the Chicago Board of Options Exchange, started trading call options. It took 4 years to get approval for trading put options.
With all the data we have on financial markets, it is clear that speculation and short selling are important parts of the system. They play a crucial role in ensuring that prices find their appropriate level.
In the end…
Junk food is a lot of fun. But it can kill you. The trick is not regulation; it is awareness.
Some financial instruments can be injurious to your financial health. The trick is not regulation; it is awareness.
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