Can anyone explain what utility, to the real economy, that short selling stocks provides? Practically speaking, why is shorting useful? What problems in the financial system does it solve. Asking in earnest.
Can you explain this more? More efficient on what axes? How does that translate to societal benefits that aren't just on paper?
* When a firm decides whether to take on new projects, they look at the projected profit of that project, and compare to their cost of capital. Only projects whose profit exceeds the cost of capital should be executed.
* Stock prices influences a firm's cost of capital, eg when raising more money.
* Relative stock prices also influence, in mergers, say, who takes over whom.
* Via all these levers and more, stock prices help select which projects of all possible ventures are realised, and who manages them.
* All of this is aimed at funding those projects that produce the highest output relative to the resources dedicated to them.
* All of this only works if stock prices are a somewhat accurate reflection of the prospects of a firm; in other words, if the share price reflects the fundamental value of the firm.
* Short sellers (and long buyers) that analyse firms and trade when they perceive a discrepancy between share price and fundamental value can trade upon that insight, which will have two effects: a) it will tend to bring the share price closer to the fundamental value, and b) it will be profitable for the firms that are correct in their assessment.
That's basically the big picture story.
There's a lot of fun Matt Levine articles on Bloomberg about this dynamic.
Eg from https://www.bloomberg.com/opinion/articles/2020-05-29/you-ca... (https://outline.com/atF74W):
> The thing about inflating your revenue by pretending that you sold more coffee than you did is that people can go to your stores and watch you sell coffee. It is a reasonable bet that they won’t do that, because it’s incredibly boring. “Who is going to send 1,500 people to our stores to watch us sell coffee all day, count how much we sell and compare it to our financial statements,” Luckin could reasonably have thought. But the answer was “short sellers”! They actually hired people to sit around watching the coffee get made, so they caught the fraud.
I also warmly recommend his "Everything is securities fraud" rant that follows this paragraph. (note: I know nothing about stock markets (or reddit or gamestop for that matter) so someone let me know if I'm just a noob eating up some slightly smarter noob's nonsense)