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Short-Selling (VIDEO): Did It Contribute To The Market's Collapse?

Huffington Post   First Posted: 03/18/10 06:12 AM ET Updated: 05/25/11 03:30 PM ET

Let's get our bearings here. What is short-selling? NYU Professor of Finance Steven Figlewski can explain:

"You sell the stock with the expectation, the intention, that you're going to buy the stock later. And in order to sell the stock, since you don't own it, you've got to borrow it from somebody."

The short seller intends to profit from the decline in price between the sale and repurchase.

Why do we care about all this market talk? Short-selling is not a new concept, dating back to the 1600s, and playing a part in the 1929 and 1987 crashes. Now, some experts are saying that "shorting" the market contributed in part to the latest global financial crisis, as "it can undermine investor confidence and ... in extreme cases, cause a run on a company's share price." Yikes.

However, just to make it a little more confusing, some bankers think the complete opposite, saying it "enhances liquidity and pricing efficiency in the markets." So who do you believe?

WATCH CNN's look into short-selling:

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