What is the purpose of short selling in a market?

Peter G: What is the purpose of short selling in a market?
Besides the objective of making money, why is short selling allowed? Why isn’t there just buying and selling of shares instead of the selling of somebody else’s shares and buying them back at a lower price to return them and keep the difference?

Answers and Views:

Answer by John W
The brokers want to do it because they charge margin interest on the margins so it’s making money using their clients money to do so. The shares actually belong to other clients that have margin on their accounts, when you apply for margin, you give the broker the right to lend your shares out provided that they be available within a certain timeframe of being demanded by you. It’s a convenience and a service to the investor, it’s another revenue stream for the broker providing the service.

Answer by Cristina Jacobs
Short selling is an important way to gauge what the fair price for a stock is. If you’re thinking about buying a stock and you see a lot of people are shorting it, then you have to ask yourself if you’re smarter than all those people who are betting against you.

If you are then great; the stock is undervalued. If you aren’t, then the stock is overvalued.

Answer by Paul N
Short selling can help bring overvalued stocks back to more appropriate prices. Short sellers helped expose major scandals like Enron for example.

Answer by Jim Z
Why shouldn’t it be allowed. Doesn’t matter if you are buying or selling, you are betting with or against the market. Someone out there has the opposite opinion as you. OK, you sell a stock you don’t own. If the stock goes up, you have to buy it from the person who is holding the stock at a higher price, you lose, he wins. If you buy a stock, there is no guarantee the stock is going to go up. If it goes down, you have lost money, and some other individual buys your stock, and you take a loss. If you short a stock, someone has offered their stock to you for your purchase.