Question

Should the practice of 'shorting' stock be prohibited as harmful to society? Should Credit Rating be a Government function to remove the conflict of interest risk?

Please answer both the questions. Thanks

Answer 1

No, Short selling helps stock market function effectively. It helps for effective price discovery and facilities hedging. It increases market liquidity -if short selling wasn't allowed market volume would severely dry up. Businesses wouldn't be able to raise capital as easily and commodities would have severe bubbles. It allows options and futures to exist. Its not possible to have options market if short selling isn't allowed.

Investors rely on Credit Rating Agencies(CRAs) to make investment decisions. Good credit rating helps them to get high value investors.Credit rating should not be a government function because it results in lesser bureaucracy. If credit rating assignment becomes a government function then it will result in potical pressures and corruption. But there are many companies which refuse to share information with the CRAs and falling under INC(Issuer Non Cooperating ) category, government should bring in rule that every company which has debt should rate their debt compulsorily so that public can make informed decisons.