What is a naked short-sell?

A naked short sale, also known as "naked shortselling" or simply "naked short," occurs when an investor sells a financial asset, such as a stock or security, without actually borrowing or possessing the asset at the time of the sale. In other words, the seller does not have the shares to deliver to the buyer upon settlement.

In a traditional short sale, an investor borrows the shares from a broker or another investor, sells them in the market, and later repurchases the shares to return to the lender. The profit is made if the price of the asset declines, as the investor can buy back the shares at a lower price and pocket the difference.

However, in a naked short sale, the seller bypasses the borrowing step and sells shares they do not own. This practice is considered controversial and can be subject to regulations and restrictions, as it has the potential to artificially increase the supply of a security in the market.

Naked shortselling is generally prohibited or heavily regulated in many financial markets to prevent abusive practices that may manipulate stock prices or create excessive volatility. The practice is illegal in some countries, and regulators impose strict rules to prevent naked shortselling.

Naked shortselling can lead to failed settlements, and regulators closely monitor and penalize those who engage in such activities. It is essential for investors and traders to comply with applicable securities laws and regulations and use legitimate trading strategies to maintain market integrity and stability.