This insert describes the practical impact of a practice called short selling. A research firm called Muddy Waters released a report questioning whether Sino-Forest actually owned the timber assets it claimed, and whether it was actually receiving the revenue it claimed. After the report was released, the value of Sino-Forest’s stock declined dramatically. Muddy Waters had been “shorting” the company’s stock (borrowing shares and selling them) before it released its report because it believed that Sino-Forest stock was not worth nearly as much as it was selling for at the time. Muddy Waters then bought shares at a much lower price to replace the shares it had borrowed. In the process, it made large profits. Critics of Herbalife Ltd. have also been shorting the stock of that company.

Consider the following statement: Short selling should be banned because it creates instability in the price of a company’s stock. Do you agree or disagree with the statement? Defend your reasoning.