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Short Selling Allowed Again

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The Tampa Tribune

Published: October 10, 2008

NEW YORK - Will stocks benefit now that the government is letting investors bet on financial stocks going down?

It's a strategy known on Wall Street as short selling. And, for three weeks, the government banned the practice to protect financial companies.

How does short selling work? How can you put money on a stock going down?

In short selling, investors borrow shares and sell them with the hope they will go down in value, so they can pay for the shares later at a lower price and turn a profit.

It is an investment strategy that turns the "buy low, sell high" idea on its head; instead, you sell high first, then wait for a good time to buy low.

Why was the practice temporarily banned for financial stocks?

Securities and Exchange Commission Chairman Christopher Cox hoped the ban would stop unlawful manipulation of stock prices. The concern was that short-sellers deliberately targeted financial companies, pushing their share prices down and leading to their collapse.

Did the ban help stabilize these companies?

Not really. Even without short sales, shares of Lehman Brothers were crippled and the company was forced into bankruptcy. And financial stocks plunged 23 percent.

Why might the absence of short sellers be bad for the stock market?

When they complete a short sale by buying a stock that has fallen, they are often buying shares that other investors don't want - and that helps push prices upward.

The Associated Press

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