Late yesterday Spain, France, Italy and Belgium imposed a 15 day ban on short selling of certain financial stocks.

This follows earlier temporary short selling bans by both Greece and Turkey.

Many experts have said that at best this is just shutting the stable door after the horse has bolted and at worst it is a sign of desperation.

But first what is short selling?

Basically it is the selling of something you rent or borrow in the hope that it will decline in value before you have to replace it and give it back to the person who lent it to you. For example, you think the price of cows is going to go down, so you borrow a cow from your local farmer and pay them a rent for it. You sell the cow at today’s prices, say £100. Then in a week’s time when the price of cows has dropped you buy it back (or an identical one) for the then going price, say £80. With a rent of £1 a week to pay out to the farmer you give the farmer the cow and you have made £19.

Unless of course the price of cows has gone up, then you will be out of pocket.

What the short sellers are doing is simply betting that the price of something will go down and putting their money where their mouths are.

This is opposed to ‘going long’ where you simply buy the stock hoping it will increase in value over time.

Short sellers say they are part of the ‘price discovery’ mechanisms of the markets.

Others say they are opportunists benefitting from others’ difficulties and that the practice causes market volatility.

One of the things that the European Securities and Markets Authority is concerned about is the link between the dissemination of misleading adverse information on companies and countries and subsequent short selling. An example is the recent unsubstantiated rumours that France may lose its AAA rating and the profits short sellers would have made out of subsequent market volatility.

Whilst Spain. Italy, Belgium and France have put these bans in place other countries have not. In the UK the FSA has said there will be no ban at present but that it would monitor the markets.

But Simon Willis, analyst at Daniel Stewart, quoted in CityWire, said those countries that did not join the ban could suffer ‘collateral damage’. And Vivek Raja of Oriel Securities warned of increased volatility and said that it was ‘dangerous’ to interfere with market forces.

Professor of economics at Harvard, Kenneth Rogoff, told the New York TimesThe short-sale ban really smacks of desperation. That’s their plan for solving the euro debt crisis? I mean, this isn’t going to buy them much time.”

And Jeremy Warner in the Telegraph said that the ban was ‘self-defeating’.

The last time this sort of ban was put in place was after the demise of Lehman Brothers in 2008, which still saw stocks fall. So is a ban on short selling now going to make any difference anyway? Or will it just make us feel that ‘someone is doing something’?

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