Short selling or "shorting" is the practice of selling a financial instrument the seller does not own, in the hope of repurchasing them later at a lower price. This is done in an attempt to profit from an expected decline in price of a security, such as a stock or a bond, in contrast to the ordinary investment practice, where an investor "goes long," purchasing a security in the hope the price will rise. Often the seller will "borrow" or "rent" the items to be sold (usually from their broker), and later repurchase identical items for return to the lender. The act of repurchasing is known as "covering" a position.

How short selling works
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How short selling works

Naked short selling, or naked shorting, is different from conventional shorting in that it is the practice of selling a stock short without first borrowing the shares or ensuring that the shares can be borrowed as is done in a conventional short sale. When the seller does not obtain the shares within the required time frame, the result is known as a "fail to deliver". However, the transaction generally continues to sit open until the shares are acquired by the seller or the seller's broker, allowing a trade to occur when the order is filled.

How naked shorting works
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How naked shorting works

Further Information on Short Selling

For another basic overview of short selling and a look into the practice's history, check out two of NPR's Planet Money podcast episodes: "We're Short America" and "The Very First Short."

References

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"Naked Short Selling vs Short Selling." Diffen.com. Diffen LLC, n.d. Web. 21 Sep 2016. < >