Should short-selling be banned?

Short Selling should not be banned, as the famous definition of Market Efficiency have a relation over here, if it is banned it's going to affect the Sentiments of the investors which indirectly will fail Market Efficiency. Rather coming up with an idea of banning it, an alternative should be brought to control it, so that Share Price does not become too volatile. 

It should not be banned due to following reasons.

The term short or long is often subjective. What is short for one may be long term for another investor.

The entire foundation of investment is based on returns risk and liquidity parameters.One cannot take out liquidity aspect and make investment a forced decesions..

Baning short selling is a bad idea because the efficient trajectory of the market is maintained by this. Even if it is baned one can use indirect methods for short selling like 1) one can sell Call options 2) One can sell ones own stock at high points and buy them back when the price hits the bottom.

Baning short sales will prevent Index Arbitrages which is another way market maintains its legitimate course.

My view is that short-selling is used for two purposes by investors-

1. Taking long-term calls on the market or a particular scrip.

2. Making descent short-term gains from the volatility subsisting in the market for some time. As we saw in August-Sept '09.

In a market scenario, free pricing will reflect the true sentiments of the players. I don't agree that short sellers reflect the true / instrinsic value of stocks but they do try to put a cap on unreasonable rise, thereby neutralising any bubble being formed by the operators.

If it got advantages then to fight downward pressure, speculation etc can consider limit on period, but don’t agree with absolute ban as it heavily affect market liquidity and price corrections and discovery.

 it has got another aspect also, for correcting mistakes in time, take advantage of a bear market and  can also indirectly affect the investor’s confidence.

I agree with Puja. Short selling investors also play a crucial role in the earning of the stock market though their investment is small, many like them together generate a lot of amount. If this type of investment is banned, then these people will not invest any more which will bring the condition again in the earlier level.We have to think something different so that we can use their money also and give them freedom for sort spellings.

No No and No. Dont try to control the sentiments. If you do it even, it will make thing worse. If someone blames Short Selling for Crisis in Sensex then why such steps are not taken when sensex was soring to 21000 level? At that time even government was blind and now suddenly people started talking about shortselling because there are set of investors / treders still want to be in the market.

The role of short selling in recent stock sell offs has been overstated and people have been looking for a scapegoat. It can certainly leaven overvalued stocks and plays a role in setting fair prices for securities and commodities. Contrary to what the public thinks the shorts can lose too. A short will lose if the is enough buying interest. If there is no interest then the stock will go down only to the point where enough people start to buy and then can even start a short cover rally. And the process starts all over at some point. All the world markets have seen a 30-40 % sell off. Indian markets would've fallen equally with or without any short-selling ban.

If the government banned the short selling it will be breached of directives and policy of sebi, and further violation of fundamental rights of small investor, and will not yield any positive sign in the market. The only reasons of recession in the market is the massive money had been deployed in real estate business by multiple banking system and most of the promoters of real estate are politicians, ministers and top officials.

The stocks in which short sales were banned in the US fell the most! Investors who want to get out, will do so through the cash market if need be. The reason why short sales shouldn't be banned is a simple one - the ban won't achieve anything, it cannot. The US banned short sales of certain financial stocks (like Goldman Sachs, for instance) - it announced a freeze on such sales for a certain period, not an outright ban -but these stocks collapsed the most.