08/05/96 TABLE: The Truth About Those That Sell Short

The Truth About Those That Sell Short

The murky world of short-selling is beset by a host of misleading--and sometimes downright false--perceptions. To clear up a few: PERCEPTION Short-selling makes share prices decline. REALITY Yes, shorts sometimes seek bad publicity that hurts stocks. But since they can't sell an issue when it's falling, they can't really torpedo stocks. PERCEPTION Short-sellers are a destructive force in the markets. REALITY Shorts add to liquidity in the markets--selling when markets are rising and buying when buying is needed most--during market declines. Shorts expose accounting irregularities and mismanagement. They also counter the hype from companies and brokerages that is so rampant on the Street. PERCEPTION Voracious short-sellers destroy companies by cutting off their access to capital. REALITY Companies targeted by shorts are often in shaky financial health and thus are unwise investments. PERCEPTION ``Naked'' short-selling--selling stocks that haven't been borrowed--is rife in the markets and helps drive share prices down. REALITY Naked shorting takes place, but its prevalence has been exaggerated by critics. Market makers can ``go naked'' in the normal course of business, but they risk heavy penalties if they do so to bet that a stock will fall. PERCEPTION Short-sellers spread lies about companies. REALITY Sometimes. But more often than not, their research is among the most detailed and accurate in the investing community. DATA: BUSINESS WEEK