Will return of short sellers spur a Wall Street rebound?

NEW YORK -- Will stocks benefit now that the government is letting investors bet on financial stocks going down?

It's a strategy known on Wall Street as short selling. The government put a three-week moratorium on the practice to protect financial companies whose shares had come under siege.

Short sellers were blamed for the massive declines in companies such as Lehman Brothers and Bear Stearns that were already crippled by the credit crunch. Still, debate continues if the moratorium did more harm than good.

With the ban having expired Wednesday night, here are some questions and answers about short selling's return to Wall Street.

Question: How does short selling work? How can you put money on a stock going down?

Answer: In short selling, investors borrow shares and sell them with the expectation they'll go down in value, so they can pay for the shares later at a lower price and turn a profit.

It's an investment strategy that turns the "buy low, sell high" idea on its head -- instead, you sell high first, then wait for a good time to buy low.

Question: Why was the practice temporarily banned for financial stocks?

Answer: Securities and Exchange Commission Chairman Christopher Cox hoped the ban would stop unlawful manipulation of stock prices. The concern was that short-sellers deliberately targeted financial companies, pushing their share prices down and leading to their collapse.

Question: Did the moratorium help stabilize these companies?

Answer: Not really. Even without short sales, shares of Lehman Brothers -- a 158-year-old investment bank -- were crippled and the company was forced into bankruptcy. And financial stocks plunged 23 percent while the ban was in effect.

Question: Why might the absence of short sellers be bad for the stock market?

Answer: Some people on Wall Street believe that short selling was wrongly blamed for problems in the financial sector, and that removing them eliminated an entire class of investors.

Short sellers can act as a cushion during declining markets, snapping up falling shares to cover their positions. In other words, when they complete a short sale by buying a stock that's fallen, they're often buying shares that other investors don't want -- and that helps push prices upward.

Question: What happened on the first trading day after short sellers were allowed back?

Answer: The market had another rough day Thursday, but experts believe that's because of the general malaise about the economy and concerns about the credit crisis. It could take some time before technical analysts can look at volume levels and determine whether short sellers even rushed back into the market.