Naked Shorting

Business, Legal & Accounting Glossary

Definition: Naked Shorting


Naked Shorting


Full Definition of Naked Shorting


Naked shorting refers to the practice of selling stocks that the seller does not own.

Short Selling

Short selling or ‘shorting’ is the practice of ‘borrowing’ stock to sell and then buying it back at a later date. This is a common practice for bearish investors who believe that a stock price is about to go down. This strategy can be used across a variety of asset types including stocks, bonds and options with the use of put options.

Naked Selling

Naked selling, however, involves the practice of selling stocks that the seller does not own or borrow. This practice is considered illegal in most countries, however, there are some loopholes that can be exploited, using discrepancies in manual and automated systems, or with the help of corrupt trading partners.

The Problem with Naked Selling

Naked selling can distort price movements in stock markets since it can take place outside of the normal buying and selling process of the market. In particular, it can be used by speculators to drive down the price of a stock, which they can then buy at a cheaper price. Since they have caused the price to drop artificially, the value of the stock should, in theory, be higher. Reversion to mean would lead to a profit.


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Definition Sources


Definitions for Naked Shorting are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th March, 2020 | 0 Views.