SEC Temporarily Bans Some Short Selling

The Securities and Exchange Commission temporarily banned on Friday the routine practice of short selling. That's when investors bet the price of a stock will fall. It's legal except when it's combined with spreading of false information. The ban on short selling applies only to financial stocks.

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STEVE INSKEEP, host:

NPR's business news starts with the latest effort to stabilize the financial crisis.

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INSKEEP: Here's one of the latest steps. The U.S. Treasury this morning says it will guarantee most money-market funds. This is a move aimed at reassuring millions of Americans who put their savings in money-market funds, and it's the latest part of the financial system to be affected by the upheaval on Wall Street. The funds are believed to be generally safe, but they've still been touched. Also today, stock-market regulators have temporarily banned a type of trading practice that many people think may have contributed to the wild price swings in the stock market. The ban on so-called short-selling applies only to financial stocks which have borne the worst of this week's turmoil. Wall Street stocks are soaring on all this news, as NPR's Jim Zarroli reports.

JIM ZARROLI: The Securities and Exchange Commission said early today that it was banning short-selling of all financial and insurance stocks until October 2nd. Short-selling is a way of betting that the price of a stock will go down. The investor borrows shares of a company and sells them, walking away with the proceeds. Later, if the share price has gone down, the investor buys new shares and repays the original owner. If the price is going down, the investor makes a profit.

But an investor can also lose money through this strategy. Short-sellers argue that they perform a kind of service to the market, shining a spotlight on under-performing companies. But critics have long argued that short-selling is a form of market manipulation, and that when the market is undergoing turbulent times, like right now, short-selling exacerbates its problems.

SEC Chairman Christopher Cox said in a statement today that the ban on shorting would help restore equilibrium to the markets. The move applies only to insurance and financial-services stocks. They have been badly damaged by the mortgage downturn, with some falling more than 90 percent this year. And many critics say their troubles have been aggravated by short-sellers. Jim Zarroli, NPR News, New York.

INSKEEP: So, that's the move by U.S. regulators, a ban on short-selling in the stocks of financial institutions.

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