Document Type

Article

Publication Date

2009

Abstract

No subject in securities regulation has generated more heat and less light than short selling. A short sale is the sale of a share that is borrowed from a third party rather than owned by the seller. At a later time, the short seller extinguishes her obligation to this third party by “covering” – purchasing an identical share in the market and then returning it to the third party. If the share price drops, the cost of covering will be less than the proceeds received earlier from the sale and the short seller will make money. Politicians and CEOs rail against short selling as a manipulative tool that artificially pushes share prices below their fundamental values. Most finance theorists, in contrast, extol short selling’s virtues as a practice that helps to quickly incorporate new information into share prices, and thus enhances price accuracy. Short selling, in their view, also provides valuable liquidity to the market and aids investors in hedging against risk. Short sales account for 31% of all sales for NASDAQ listed stocks and 24% of all New York Stock Exchange (“NYSE”) listed stocks. They are thus an important phenomenon, certainly big enough to affect prices.

Disciplines

Law | Securities Law

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