A less-publicized and more-sinister version of short selling can take place on
Wall Street. It's called "
short and distort" (S&D).
Nothing is inherently wrong with short selling, which is permissible under the regulations of the
Securities and Exchange Commission (SEC). However, the S&D type of short seller uses misinformation and a
bear market to manipulate stocks. S&D is as illegal as the
pump and dump, but is mainly used in a bear market. It is important for investors to be aware of the dangers and to know how to protect themselves.
Shorters' Actions Can Promote a Healthy Market
Short selling is the practice of selling borrowed stock in the hope that the stock price will soon fall, allowing the short seller to buy it back for a profit. The SEC has made it a legal activity for several good reasons. First, it provides the markets with more information. Shorters (traders who practice selling short for a living) often complete extensive and legitimate
due diligence to discover facts and flaws that support their suspicion that the target company is overvalued. Because most shorters are scrupulous and ethical, their actions are conducive to the health of the market. Finally, short selling also provides investors who own the stock (with "
long" positions) with the ability to generate extra income by lending their shares to the shorts. (For background reading, see the
Short Sellingtutorial.)