There has been a lot of news coverage lately about a bunch of amateur investors coming together through various platforms to drive up stock prices to “get back” at those shorting stocks (something generally reserved for the more professional and experienced traders). What is the Jewish view on shorting stocks?

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Short selling (or shorting) stock is an investment or trading strategy. Think of it like this. You borrow someone’s lawn mower, sell the lawn mower, and then find the same model on Craigslist at a cheaper price, give that one back to the lender, and pocket the difference, assuming (of course) that he is OK with the switch. When shorting stocks, the investor borrows shares and then immediately sells them in the belief that the price of the shares will soon fall. He can then buy these shares at a significantly lower price to return the shares to the lender, pocketing the difference.

If, however, the price of the stock rises, the short seller, in order to return the stock to the lender, will be forced to buy back the stock at a higher price than what he sold it for and will incur a loss. In the analogy above, if you can’t find that same mower on Craigslist at a cheaper price, you’re forced to buy it at a higher price to return the mower to the lender.

Motives for Shorting Stocks

Before discussing potential technical halachic issues with shorting stocks, the reason and motives you have for shorting the stock can itself be an issue.1

If you short a stock because, in your estimation, based on publicly available information, the stock is overvalued and will likely very soon decrease in price, then it usually isn’t considered a problem from an ethical perspective. However, it would not be halachically permissible to short stock based on inside information or suspicion of corporate fraud or similar issues (in which case the stock is overvalued).

Here’s why: According to Jewish law, when you sell a product (in this case shares), you must inform the buyer of any flaws you know of. If you fail to disclose a flaw in the product, then the sale is considered void.2

Additionally, it is not halachically permitted to short stocks if you’re the company's competitor and want to make money off the competition. Although in some situations you’re allowed to open a business in direct competition with another,3 you must be making money off your own assets, not the competition’s (which is essentially what you are doing when you short stocks).4

Returning Stock-for-Stock and Usury

We can now turn to the underlying issue with shorting.

According to the Torah, a Jew is prohibited from borrowing or lending money to another Jew with interest (usury).5 This law applies not just to money, but also merchandise (e.g., you cannot lend someone 5 lb. of apples and have them give you back 6 lb.).6

Biblically, one would be allowed to borrow, use and return the same amount (but different) merchandise. However, in many situations, the rabbis prohibit doing so, since the value of the merchandise may have gone up (e.g., the 5 lb. of apples were worth $5 when they were borrowed, but are worth $8 now). This prohibited practice is called se’ah b’se’ah (“measure for a measure”).7

For this reason, “loans” of merchandise need to be repaid based on the merchandise’s value at the time it was borrowed. If you want to return actual merchandise, then you need to return the amount equivalent to the value of the merchandise at the time it was borrowed (e.g., only $5 worth of apples, even though that is now less than the 5 lb. that were borrowed).

Shorting stocks, which is essentially borrowing and returning a product at a different price, is the poster child of this prohibition, if you are borrowing from a fellow Jew. Furthermore, while there is an exception to this prohibition when there is a fixed market price for the product and it is readily available,8 this obviously would not apply to shares, which are always fluctuating.

Owning Some of the Share and Heter Iska

There are, however, a number of possible solutions to avoid this prohibition.

In general, the rabbis are lenient (since this prohibition is, to begin with, rabbinic in nature) in a situation where the borrower already has the same type of item in his possession (e.g., apples or shares of the same company) at the time the item was borrowed. In this case, we view the transaction as if the borrower simply traded his item for that of the lender’s.9 Therefore, even if the price of the item changes, there is no concern of interest, since it is as if the item is already in the possession of the lender.

Thus, if you actually own some of the shares, it would seemingly be permitted to short.

Alternatively, one would need to draw up a halachic partnership called a heter iska with the Jewish person that you are “borrowing” the shares from. In a heter iska, the transaction is structured in such a way that both parties are considered partners in the “investment.” Drawing up a heter iska can often be complicated, depending on the transaction, and a competent rabbi needs to be consulted.10

Be Wary of Investing in Stocks

In general, the Lubavitcher Rebbe discouraged people from investing in the stock market, as he felt it was “largely a matter of speculation . . . [and] it is particularly objectionable because of the anxiety and nervous strain that it creates in some people.”11 Instead, the Rebbe advised people to consider other types of investments.