Short selling is a very destructive process and should not be legal. There is no good description of it in common knowledge which makes any sense. No investor in his right mind would “lend” his stock to be sold short since it directly contradicts his financial interest by expanding the supply of stock in the market. Anyone wishing to bet against the stock can simply sell calls or buy puts.
Fraud is at the bottom of this. Brokers allow stock held in margin accounts to be used by short sellers for a fee. Most of those with margin accounts are not aware of this. Brokers profit, speculators may profit and stock owners get screwed.
see 9.
This reminds us of the manipulation of the stock of the New York Central in the 19th century.
Short selling is fine, has been around for hundreds of years (since 1609 iirc) and with the exception of naked shorts, does good things for the financial system in general. It’s too damn bad if someone decides to short the stock of the firm you work for. You have to be on top of that and fight back. If you’re too weak, too bad. Someone else will make better use of your productive assets.
When a stock is sold short, the owner receives a fee for the transaction. In many cases, the seller will be a brokerage house, but the contracts with its clients will allow the house to sell stocks short in exchange for charging lower fees than would be required if the clients did not allow such action. As to whether the owners of stock should regard their consideration as adequate, that's a matter for them to decide.
Generally, honest short selling does not harm stockholders; while their selling price per share will likely be lower than it would have been without the short-sellers, their buying price will also have been lower. Naked short selling needs to be policed more fiercely, since it can totally disrupt a market, but honest short selling tends to be somewhat self-limiting; when short-selling pressures become too strong, shares will tend to migrate into the hands of people who won't allow them to be re-sold.
It's important to recognize that for any market to function, there must be a balance between people who want the price of something to go up and those who want it to go down. If nobody in a market wants prices to go down, prices will go up as long as people keep pushing money into the market. As soon as people stop putting money into the market, however, prices will crash to the levels they would have had in the presence of moderate downward pressure.
If I'm investing $50/month in Acme stock, I'd like for the share price to be as high as possible when I cash it in. On the other hand, I'll be much better off if the stock sits at $1/share until the day I cash it in when it soars to $5, than I will be if the stock quickly climbs to $50 and stays there until I stop buying shares and cash them all in.
Were it not for the double taxation of dividends, it would seem better for companies to reward their shareholders with dividends rather than asset appreciation; companies that wanted to expand could sell more shares (which shareholders could buy using their dividends). While a dividend-oriented market would have some risks of its own (e.g. if a company pays dividends largely from stock proceeds rather than from actual profits) I would expect it to be less prone to mania and bubbles.