How Short-Selling Hurts Your Investments
The news that the SEC has placed a temporary ban on short-selling certain stocks might have you asking questions about how it affects you. Here’s the deal:
When you buy a stock, you’re betting that the price of that stock goes up and that you can sell it later for a profit. Short selling is just the opposite; you bet that the stock price will go down, and if it does you profit off the difference.
Shorting stocks is complicated and extremely risky, and not something the average investor does much of. But this unprecedented ban on shorting affects all of us because it restores confidence, which we need in a big way right now.
Many believe that it was the short sellers that were driving down stocks so precipitously these last few days, speculating on the next bank to go bust. Now with the ban in place, investors in banks and financial service companies feel more confident that no one is betting against their demise – at least right now. The ban lifts on Oct. 3. Then, once again, all bets are off (or back on).
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