I understand what the actual process of doing so is, but for example I’ve seen people who work on wall street try to reassure us that it’s a normal and healthy part of wall street. I don’t understand how it’s allowed, or why any company would allow it to happen to their shares?
In: Economics
It supposedly helps with fair price discovery, and hinders that when not allowed.
You see anyone who thinks a share is undervalued can expressly state so by buying it.
However if you think a share is overvalued what you would do to express this sentiment is sell it, which you couldn’t do otherwise if you don’t actually have shares. That would be an inherent unbalance.
Otherwise? Because it’s never been forbidden and that is because it never caused trouble before. It used to even be allowed to short shares that you didn’t have at all, without borrowing them. Granted only intra-day since you can’t have a negative amount of shares once you get to clearing, but still that existed.
And even if short selling were disallowed, what would that accomplish really? The short answer is practically nothing. The effect of short selling a share? You can always do pretty much the same through the options market by selling calls or buying puts.
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