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October 17, 2008
Short selling
Recently, the government banned short selling for financial firms, at least temporarily. What is this activity and why was it banned?
Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"It's a common technique that I'll say advanced traders in the stock market use. And what you're doing with short selling is you're purchasing the right to buy a stock in the future. You don't buy it now. You buy it in the future. But you, therefore, expect and hope that its price will go down. So in essence, you're betting on falling stock values. Now, of course, in the context of today's situation, what we've seen happen with many of the big financial firms, which have been having problems, is they have been seeing their stock values plunge. And so the government in saying, 'Well, wait a minute. Let's maybe give a breather to these financial stocks. Let's temporarily ban short selling of financial stocks.' And the concern, I think here, is that perhaps this short selling - with, again, the expectation that when you do it, the price of the stock you're buying will fall in the future - that that was sort of adding fuel to the fire, that was causing, perhaps, some of these stock values to fall further. Now that's very controversial, but that at least is the view. And so I think the government is saying, 'Let's ban short selling for a little bit for financial stocks in order to give those stocks some support, at least temporarily.'"
Posted by Dave at October 17, 2008 08:00 AM