Short Selling: What purpose does it serve?

This thread is meant for those with a better understanding of the Markets.

The only news channel I watch is CNBC. I watch because I find it very interesting. I do not knoiw much about the stock market as a whole, but I am trying to learn. I constantly lok up new terms that I hear and one of them is short selling.

I understand what it means and how they do it, but I have read and heard mulitple persons say it is a necessary action within the market as a whole?

Simple question hopefully one of you gurus out there can answer.

Why?

Why is short selling necessary/

It seems to me naked- short selling is pure and basic theft. And it would seem that short selling just leads to naked short selling.

Another thing. Will the naked short sellers ever get caught? Will they have to "close their position"?

What would the consequences be for naked short selling?

thanks in advance for any replies...

Short selling is just betting the stock will go down in the most basic sense. This is very important to keep stocks in check.

When short selling was banned, the problem is that stocks will go up if bought, and down if sold, but there was no one pushing the value down to a more realistic point (as realistic as an emotional irrational market can make it).

Basically there is no reason people shouldn't be able to bet that a stock will be going down. To make short-selling possible, it takes a broker or someone to lend them the shares too. So there are no shady things happening at all.

reply to post by vapedson


An article in The Economist (a free-market-leaning magazine) mentioned in passing that the short-selling of stocks provides markets with liquidity and information, which have been lacking in this crisis.
I don't know enough about the subject to offer more, but that is their opinion.

i don't think it is required to push down prices or anything else and it isn't betting on stocks going down, it's selling something you don't have, especially the case in naked short trading.

the people who are claiming it is a natural function of the market are the ones that made a fortune selling shares in companies just before rumors suppress the value of those shares.

it's a shadey enough practice in good times but at the moment it would be suicidal. and yes, traders are willing to lend these shares to short sellers, but mostly because the traders loaning shares have no vested interest in the value of the shares they are lending.

they're lent from pension companies etc. that expect an increase for investors of about 6% per annum, as far as they are concerned if the value of the investment is 8% in the secound 1/4 then they can afford to have the values drop by 2%, collect the lending fee from the short seller and a bonus/commission from the investors.