naked short selling
The illegal practice of short selling a security without first borrowing the shares or ensuring they can be borrowed, effectively selling shares that don't exist.
Example
“Naked short selling is banned in the US because it can artificially suppress stock prices by creating phantom shares.”
Memory Tip
NAKED short = selling shares you haven't even BORROWED yet. Illegal in most markets.
Why It Matters
Naked short selling affects everyday investors because it can artificially depress stock prices and create market instability. When unscrupulous traders engage in this practice, legitimate shareholders may see their investments decline in value due to artificial selling pressure rather than genuine market conditions.
Common Misconception
Many people believe that all short selling is illegal, but only naked short selling without proper share borrowing is prohibited. Regular short selling, where traders borrow shares before selling them, is a legal practice that sophisticated investors use as part of their trading strategies.
In Practice
Imagine a trader wants to short sell 10,000 shares of Company XYZ currently trading at $50 per share without owning or borrowing the shares first. The trader sells these non-existent shares for $500,000, hoping the price drops to $30, but regulators discover the shares were never actually borrowed or located, making this transaction illegal naked short selling.
Etymology
NAKED (unprotected, without borrowed shares) SHORT SELLING. SHORT SELLING without the NAKED (uncovered) borrowing of shares.
Common Misspellings
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Related Terms
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See Also
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