this is what happens when you allow short selling! The short buyers buy huge amount of short stock with only about 10% capital. They then spread a rumor, stock prices plummet and then the short buyer makes millions! Bad for investors and causes extreme fear on the markets!
And fear is stronger than greed. Not only that, the selling itself, besides causing the fear and/or financial panic, often triggers the forced portfolio liquidations due to margin calls and "stop orders", thus rolling down the price like snowball from top of the mountain turns into avalanche. The margin calls, portfolio liquidations and market panic, in turn, affect the stocks that have nothing to do with initial issues or industry.
Capital destruction leads to economic contraction. Intended or unintended consequences? That is the question.
Of course there is mischief that can be done with shorting, but there is mischief that can be done through making it illegal. It is sort of like fire: it can be dangerous, but the benefits outweigh the downside.
Just what we need: make short-selling illegal! NOT!
What’s informative in this article is the description of the use of credit default swaps mixed with shorting. The CDS market is what scares me. While I’m not a great fan of regulation, allowing this unregulated market in these complex instruments has been the black hole of this market meltdown and it may go further, unfortunately.
Oh bull. Short sellers are the only ones that put a floor under the market. Geez, get a clue and look at China. They’ve never allowed short selling and their indices are off 70%. They are just now talking about allowing short selling.
TallyHoe,
Short selling is what happens when one individual, a stock owner, agrees to lend or rent the benefits of stock ownership to another person. The right of individuals to contract among themselves in this way is basic. Apartment rental is similar...one transfers the privileges of ownership to a different person for a period of time in exchange for compensation.
What is the compensation to a person who allows stock to be lent? It is access to a margin account, with features not available in a cash account. In a margin account one can trade more kinds of instrument and receive broker loans.
What is not basic, is fraudulent and should not be allowed, is naked short selling, where the original stock does not exist. Effectively, securities are being manufactured out of thin air on demand. This is nothing short of fraud.