What Is Naked Short Selling Of Stock ?
A naked short sale is also called a naked shorting. It is a process where you short sell a security without borrowing it or even ensuring that it has been borrowed. In a regular short sale, the process of borrowing is done with full authorization and then only the stocks are sold. However, in the case of the naked short sale, the permissions are not taken. |
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If the seller, in case, does not get the shares back in time to return to the lender, then it is called as failure to deliver. This can be rather dangerous for an investor. Every short sale is a transaction which has to be closed within a set amount of time and only then the transaction is considered as complete.
Naked short selling does not violate any rules nor is it illegal. However, it is considered illegal only when stock brokers use this concept to forcibly drive the price of a stock down to their own advantage. This might affect several other investors on a large scale. The concept of naked short selling can be widely misused.
However, in the United States the concept of naked short selling is governed by various SEC rules, and it is not easy to take advantage of the falling stock prices. There is very little scope for cheating and manipulating. Naked short selling is one of the widely used concepts in selling and buying of shares in the markets. However, this concept has been considered as damaging for companies that are trying to raise funds through investments.
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