Short-selling, the practice of selling a security the seller does not own, is done in an attempt to profit from an expected decline in the price of the security. During the recent financial turmoil, many press accounts blamed short-selling for declines in stock prices and even for the collapse of some firms. In this article, Ronel Elul discusses the issue of short-selling. He notes that research has shown that short-selling plays a valuable role in setting accurate prices for securities but that it can also be used to facilitate market manipulation. This latter consideration may provide justification for restricting short-sales under certain circumstances.
This article appeared in the Second Quarter 2009 edition of Business Review.
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