Short selling involves 'selling' something you don't own expecting the price to go down in the future. In extreme cases this technique can destroy an economy like an old fashioned, panic induced, bank run.
Definition of Short Selling:
What Does Short Selling Mean?
The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.
Investopedia explains Short Selling
Selling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.
This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to avoid short sales.
The markets rise after some EU countries ban short-selling but will it have a lasting effect?
Click Here to Watch Video
Notes on above video:
1. 20 secs - Rumors can move markets
For example; "Every day cold hard facts are the fuel that drives the markets: News about a company or country, favorable or not. But markets are living organisms, made up of Alpha type men and women desperate to take advantage of situations real or perceived. So in the absence of facts, they will listen to rumors and try and judge whether those rumors are likely to be true; then buy or sell on the back of them.".
2. 1min 36 secs - 'professional investors would look at this with allot of misgiving... cause of suppression being forced in the market place... by agencies, typically market authorities or governments, which shouldn't be stopping natural market appetites and that will spook the professional investor' - note: if this 'professional investor' deals in rumors to spook markets to sell stuff they don't have in hope of making money... then maybe you have your priorities messed up?
3. Clear cut regulations with explanations are needed in areas where market manipulation is dangerous to an economy.
4. Video explanation of short selling.
Some historical perspectives:
"The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.
As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.
The SEC has linked such so-called fails-to-deliver to naked short selling, a strategy that can be used to manipulate markets. A fail-to-deliver is a trade that doesn’t settle within three days.
“We had another word for this in Brooklyn,” said Harvey Pitt, a former SEC chairman. “The word was ‘fraud.’”
Arguments For and Against Short Selling:
Against
"The argument for restricting short-selling runs as follows: betting that catastrophe will befall a bank can become a self-fulfilling prophecy; if a bank's shares or bonds can be forced down to distressed levels, its cost of funding will increase as counterparties lose faith in its solidity; in this way real damage is done to the bank; thus the odds are skewed unfairly in favour of the short-seller."
For
"The trouble is, this argument is a little too unworldly. Short-sellers may not be the most cuddly creatures in the financial jungle, but they do contribute to biodiversity. Even the Committee of European Securities Regulators, the predecessor to the new EU regulator, acknowledged last year that legitimate short-selling helps markets run efficiently. It can help to prevent bubbles – miserable Eeyores are a useful check on excitable Tiggers."
Samantha from The Daily Show Illustrates Short Selling (with a bias towards fairness)
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