bigmacbear (![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
bigmacbear) wrote2008-09-18 10:44 pm
bigmacbear) wrote2008-09-18 10:44 pm
I learned a new financial term today.
Naked short selling. No, this is not about day-traders operating over the Internet from the privacy of their homes without a stitch of clothes on. ;-)
In an ordinary "short sale", an investor borrows stock from a broker, then selling it on the open market in hopes that by the time he must return the stock to its owner, its price (at which he must re-purchase the stock to return) will have fallen enough that the proceeds of the initial sale will cover the repurchase and the fee charged for borrowing the stock, and leave some residual sum as profit. The broker may in turn borrow that stock from a customer, sharing a portion of the loan fee with the customer actually owning the stock.
A "naked short sale" is one in which either the broker fails to deliver the stock that was borrowed, or the investor didn't even bother borrowing the stock in the first place. If done intentionally, this is considered illegal, and may be prosecuted as securities fraud in several jurisdictions including the US and the UK.
In an ordinary "short sale", an investor borrows stock from a broker, then selling it on the open market in hopes that by the time he must return the stock to its owner, its price (at which he must re-purchase the stock to return) will have fallen enough that the proceeds of the initial sale will cover the repurchase and the fee charged for borrowing the stock, and leave some residual sum as profit. The broker may in turn borrow that stock from a customer, sharing a portion of the loan fee with the customer actually owning the stock.
A "naked short sale" is one in which either the broker fails to deliver the stock that was borrowed, or the investor didn't even bother borrowing the stock in the first place. If done intentionally, this is considered illegal, and may be prosecuted as securities fraud in several jurisdictions including the US and the UK.