Short Selling, a Christian Morality Issue?
Trade and investment are frequently referenced in the bible; most notably so in Proverbs and Ecclesiastes 11:1–6, but modern trade now consists of complex instruments, trading strategies, and debt leverage. At it’s core, a basic investment (or going long an asset), bets on a rise in value, and it is clear the bible has no qualms with this, but what about short selling?
The Basics
Shorting a stock, is the inverse of a tradition view of investment. Ordinarily, you would buy an asset or a stock hoping it rises in value, and sell it for a profit later on. A short sale reverses these two steps, enabling a profit, if the asset or stock falls in values. This can be used as a standalone strategy, or to hedge (protect) a long position.
Take our fictional example firm, Very Boring Company (VBC), and imagine our investor Jim owns 10 shares that he bought last week for $10 per share, and they are now trading at $14 per share. This morning Jim has read this quarters balance sheet for VBC and notices debt to equity has risen substantially, he believes this is an indicator of a downward trend for VBC stock, and as such decides to adopt a short position.
For Example
Jim goes to a broker and and signs a short contract where he borrows 5 shares of VBC, and agrees to give them back at a time in the future.
Jim then sells the borrowed shares for the market price, $14 per share netting him $70 in cash.
As the contract comes to maturity, VBC has dropped to $8 per share, Jim buys back the 5 shares he borrowed, and returns them to the broker.
He gained $70 from the sale, and bought the shares back for $40, leaving $30 profit.
Without this strategy his 10 shares would have dropped $20 in value, but Jim was able to secure a profit, even when the price went down.
What has this got to do with morality and the Bible?
There are many Christian views on the immorality of short selling stock and I will try to summarize and respond to a few common arguments I have heard.
1- Short sales involve selling something that isn’t yours, in the hope of gaining a profit, this is theft.
Exodus 20.15: Thou shalt not steal.
This is true, the stock you initially sell does not belong to you, and the owner of the stock is not notified when you short their shares. But legally a broker is required to inform investors, if they allow short sales of stock, it is then up to the investor if they are happy with this.
2- Buy shorting a stock you’re pushing price action down, conning someone else out of their money.
Romans 13:10: Love worketh no ill to his neighbour: therefore love is the fulfilling of the law.
This is an interesting point, simply put, shorting a stock does not make a stock go down, it merely enables profit to be made if the stock goes down. However, more recently short interest (the degree to which a stock is being shorted), has been made more public, and though high levels of short interest have no effect on stock price, this still causes fear among many naïve investors and may cause them to sell, and this can causes a temporary drop in prices.
3 - The profits of short sales are contingent on the condition that someone else loses money, and that is not a biblical value.
Assuming any position within the stock market is a risk, and the very best an investor can do, is make educated guesses. If another investor and I both have access to the same information regarding a company, and the investor reaches the conclusion, he thinks the price will go up based on the companies financial statements. I also reach a conclusion, but I think the price will go down as I believe the business model is outdated. Neither investor has done wrong by the other.
4 - It is a strategy exploited by evil hedge funds, motivated to protect their own money.
This is without a doubt a strong emotional argument, but I do not believe it to be a biblical one. By definition, the purpose of a hedge fund, is to hedge risk. When used correctly, a long-short strategy assumes opposing positions to limit your losses. This is not unbiblical at all, we are warned of taking on too much financial risk in Ecclesiastes 11:2:
If the clouds be full of rain, they empty themselves upon the earth: and if the tree fall toward the south, or toward the north, in the place where the tree falleth, there it shall be.
As for the view that hedge funds are evil, that is subjective. Hedge funds are subject to less financial regulation, have access to much higher leverage than other firms, and can trade on a wider range of instruments. Many hypothesise that the complexity with which some funds trade, is motivated by masking tax dodges, trade information distribution and hidden subsidies but this is speculation.
Conclusion
Short selling is a legitimate strategy to hedge risk, and should be treated as such. Only about 10–15% of the stocks on the stock market are lent to short sellers, so when prices do drop, it is highly unlikely this is due to any action of short sellers. Investing in a stock and shorting a stock assume opposing positions on the same underlying, it is not unbiblical to reach a different investment conclusion to another.
Lastly, you should assess your motivation behind a short sale, typically Christian investments are motivated by a biblical drive to bless others, and this is not the case with short sales. The question is whether you are making an educated and rational decision; to short or to hedge, or are you chasing quick profits?
Proverbs 21:5 — The plans of the diligent lead surely to plenty, But those of everyone who is hasty, surely to poverty.
1 Timothy 6:10 — For the love of money is the root of all evil: which while some coveted after, they have erred from the faith, and pierced themselves through with many sorrows.
