What is nake short selling?

Question

I have been short selling for the first time. And I have read some things about Nake Short Sell and they said it is when you sell a stock short without first borrowing the shares and that if it is not delivered in the three settlement day.

I use Scottrade and all I do is type in the symbol and the number of shares and "Sell Short." And when I cover, I just "Buy to Cover."

What is the delivering and the borrowing part all about? Since it is illegal, does Scottrade tell you that you are Nake Short Selling?

I know I'm not getting something or I'm missing something. Please explain.

Thanks.

Answer 1

Yes short selling is selling the stock without borrowing to make delivery.

A naked short sale is when someone sells short, the broker doesnot or cannot borrow and the customer does not cover.

Some OTC firms do not have edits on their order entry system and naked shorts get into the system

Currently the SEC has been investigating naked short sales, there have suits against naked sellers, eventually the SEC will stop it

Scottrade, like all brokerage firms do the borrowing for you, since they are required to make delivery to the buyer.

When you sell short, some one has to give the buyer the stock, thats why your firm will borrow the stock to deliver

When you cover, which means you're buying, that stock when it comes from the seller is given to the lender

If the brokerage firm can not borrow the stock, they will not let you sell short  (when you entered your sell order it was edited for availability to borrow among other things) and the order will not be executed,

If you sell short, and the firm borrows, if the lender wants the stock back and your firm can not borrow it, you would be made to cover the sale.

Joseph T gave you some bad information, naked selling has nothing to do with money, it only involves the stock

Answer 2

Naked means that you do not have enough money invested to cover your position. Extremely risky. In selling short you have UNLIMITED upside risk. If a stock is going down it can only go to $0.00, if it is going up (against your short position) the sky is the limit on the price. Called squeezing the shorts....forcing you to sell at a MAJOR loss. Selling short you should not do unless you are EXTREMELY knowledgable.