Business, Legal & Accounting Glossary
Naked shorting refers to the practice of selling stocks that the seller does not own.
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, 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.
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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This glossary post was last updated: 28th March, 2020 | 0 Views.