Short selling involves borrowing shares of a company’s stock and selling it with the hope it can be bought back at a later date at a lower value. This strategy is a way to profit from the fall of a stock price. It is generally not looked on favorably because of fears it can help send stocks on a downward spiral. Naked short selling on the other hand involves betting that the stock will go down in price without actually borrowing the stock or finding out if there is available stock to borrow in order to short it. Without an inventory of stocks to borrow, naked shorting can leave a stock open to market manipulation.

In the U.S., short selling is legal as long as there is an inventory of stocks to borrow. Naked shorting is illegal but due to various loopholes in the rules and discrepancies between paper and electronic trading systems, cases of naked shorting sometimes happen.

Short selling is praised and criticized by many governments, economists and financial professionals. One school of thought argues that short selling helps any overvalued security to achieve its real market value and placing restrictions on it causes the asset to have an unreal value. Some oppose to this theory and argue that short selling only brings more volatility to the market place and that investors and traders should not be profiting from a company or asset's loss.

  1. If an investor is short a dividend-paying stock on record date are they entitled ...

    Learn what short sellers must do when they are short a dividend-paying stock on record date. Read Answer >>
  2. I want to try short selling, but how can I sell something that I don't own?

    Money can be made in the equities markets without actually owning any shares, but this tactic is not for new investors. The ... Read Answer >>
  3. Can you short sell ETFs?

    ETFs (an acronym for exchange-traded funds) are treated like stock on exchanges; as such, they are also allowed to be sold ... Read Answer >>
  4. How long can a trader keep a short position?

    Learn whether there are any limitations on how long may an investor hold a short position, and explore the costs associated ... Read Answer >>
  5. What is the difference between a short squeeze and short covering?

    Learn about short covering and short squeezes, the difference them and what causes short squeezes. Read Answer >>
  6. Are IPOs available to short sell immediately upon trading, or is there a time limit ...

    The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at ... Read Answer >>
Related Articles
  1. Investing

    The Truth About Naked Short Selling

    The media demonizes naked short selling, but in most cases it occurs in a collapse, rather than causing it.
  2. Trading

    Naked Options Expose You To Risk

    Find out why these enticing options can spell trouble for your bottom line.
  3. Trading

    Explaining The Naked Call

    A naked call is one of the riskier options strategies around. Find out how this strategy works, as well as the potential risks and rewards of using it.
  4. Trading

    Why is Short Selling Legal? A Brief History

    Short selling -- selling borrowed stock in hopes the price goes down --used to be unregulated.
  5. Investing

    The Basics Of Short Selling

    Short sellers enable the markets to function smoothly by providing liquidity, and also serve as a restraining influence on investors’ over-exuberance.
  6. Trading

    Short Interest: What It Tells Us

    This figure can be a real eye-opener about the market sentiment surrounding a given stock.
  7. Trading

    An Overview Of Short Selling

    Short selling is not as harmful as people think, and actually serves an important function in the market.
  8. Trading

    Understanding Short Covering

    Short covering is buying back borrowed securities to close an open short position.
  9. Trading

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  1. Naked Option

    A trading position where the seller of an option contract does ...
  2. Short Selling

    Short selling is the sale of a security that is not owned by ...
  3. Naked Call

    An options strategy in which an investor writes (sells) call ...
  4. Short Sale

    A market transaction in which an investor sells borrowed securities ...
  5. Naked Writer

    An options seller who does not own the underlying security for ...
  6. Naked Warrant

    A warrant that is issued without a host bond. A naked warrant ...
Hot Definitions
  1. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
  2. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
  3. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  4. Federal Debt

    The total amount of money that the United States federal government owes to creditors. The government's creditors include ...
  5. Passive Management

    A style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index. ...
  6. Series 7

    A general securities registered representative license administered by the Financial Industry Regulatory Authority (FINRA) ...
Trading Center