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Why Short Selling is to Blame for Stock Market Volatility


As financial regulators try to calm volatile stock markets, officials in the United Kingdom and the United States have temporarily banned a practice called "short selling" of financial stocks.

Selling short is a way of making money if a stock goes down in value.

The investor borrows some stock and sells it, promising to return the same number of shares to the lender.

If the price falls, then the investor can buy back stock at a lower price and return the same number of shares.

The profit is the difference between the sale price of the borrowed stock and the cost of replacing it. But if the price goes up, the investor loses money.

Short selling is legal, but is banned for the time being in financial stocks as officials try to calm chaotic markets.

Critics of short selling say it can become a self-fulfilling prophecy. If a stock attracts a large number of short sellers, it could worry other investors, who could sell their stocks, pushing the price down.

It is illegal to spread lies about a company's stock in an effort to push the stock price down, and officials are investigating the possibility that some short selling was dishonest.

Some information for this report was provided by AP.


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