'Naked' Short Selling Gets a Close Eye (1/2)

The Securities and Exchange Commission in the United States recently moved to protect nineteen major financial stocks. The agency gave an emergency" class="hjdict" word="emergency" target=_blank>emergency order to restrict" class="hjdict" word="restrict" target=_blank>restrict what is known as "naked" short selling of those stocks. This is a form of stock trading that is being blamed for sharp drops in the price of some financial stocks.

Short selling is a way to make money when a stock price falls. It involves borrowing shares of stock and then selling them in the hope that the stock will lose value. Later, the shares are purchased back and the loan is settled.

If the stock has lost value, the selling price will be greater than the purchase price. The difference is profit for the investor. If the stock price rises, the investor" class="hjdict" word="investor" target=_blank>investor loses money. Short selling is considered a necessary part of an efficiently" class="hjdict" word="efficiently" target=_blank>efficiently operating market.

With naked short selling, however, trading takes place with shares that have not yet been borrowed -- and may never be. Naked shorting lets traders short sell large amounts of stock that may not be available to borrow in the market. Sometimes, lenders of securities tell several short sellers that they can borrow the same shares.