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Short Selling and the Great Depression: Echoes

In the midst of the Great Depression, people who bet on stock-market declines were considered unpleasant, unwanted, un-American, un-something. Yet as a New York Times writer noted in February 1932, "The bearish speculator is not often reviled in healthy markets; it is when prices are declining that opprobrium is heaped upon him."

Short-selling transactions involve a broker "lending" equity shares to an investor, who pledges to return them at a later date. Usually, the broker sells the shares, credits the investor's account, then waits for the investor to repurchase and return them. If the buyback price is lower, the account balance, less fees and interest, represents profit; if the price is higher, the investor adds funds and takes a loss. Short sales can yield big gains when markets collapse, but analysts have long debated whether they accelerate price slides or instead help establish "fundamental" values after a bubble.