Congress may well ban or restrict the short selling of stocks. This episode of What’s Ahead explains why this would be a big mistake.
Short selling can actually dampen the overvaluation of particular stocks or other financial assets, thereby helping to curb excessive speculation.
That’s what hedge fund manager John Paulson did in 2007, when he effectively shorted the white-hot subprime mortgage market. That disastrous bubble would have been even bigger—and more damaging—if Paulson hadn’t done what he did.
Short selling is no different than the normal selling of shares of a stock, except that in this case, the investor borrows the shares, in the expectation that he can buy them back at a lower price when he returns them to the lender. If instead the stock goes up, our short seller loses, and, as institutional short sellers discovered with GameStop and other certain other equities, the losses can be savage.
Short sellers are about as popular as hyenas and sharks and make a convenient political target. Nonetheless, Congress should keep its hands off here.
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March 02, 2021 at 06:00PM
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Ban Short Selling? A Big Mistake! - Forbes
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