Short Selling vs Illegal Naked Short Selling: Understanding the Differences and Risks in the Stock Market

Short selling and illegal naked short selling are two distinct financial practices that are often misunderstood by investors. While short selling has been a part of the stock market for a long time, illegal naked short selling is a prohibited practice that can harm companies and their shareholders. In this article, we will explore the difference between short selling and illegal naked short selling, and the risks associated with each practice.

Short Selling: A Legitimate Market Practice

Short selling is a financial practice where an investor borrows shares of a stock from a broker and sells them, hoping to buy the shares back later at a lower price and profit from the price difference. This practice is widely accepted in the stock market and is used by investors to hedge against market risks, make investment decisions, and potentially profit from market downturns.

Illegal Naked Short Selling: A Prohibited Practice

Illegal naked short selling, on the other hand, is a prohibited practice that occurs when an investor sells shares they do not own or have not borrowed. This creates an artificial supply of shares and can lead to a distorted view of the stock's value. Illegal naked short selling can cause harm to the company and its shareholders, as it can artificially depress the stock's price and potentially result in losses for investors.

The Securities and Exchange Commission (SEC) has allowed the illegal practice of naked short selling and has not established rules and regulations to prevent illegal naked short selling and maintain the integrity of the financial market. Corrupt individuals are still engaging in illegal naked short selling, often through prime brokers. It is important for investors to be aware of this prohibited practice and the potential risks associated with it.

Example: The Case of Gamestop ($GME)

The ongoing GameStop ($GME) short squeeze is a prime example of the potential impact of short selling on the stock market. In this case, individual retail investors bought GameStop shares, causing the stock price to soar and putting pressure on short sellers who had bet against the stock. This led to corrupt prime brokers colluding with ILLEGAL naked short sellers to disable the buy button. The ongoing GameStop short squeeze highlights the importance of understanding the difference between short selling and illegal naked short selling, and the potential risks associated with each practice.

In conclusion, short selling and illegal naked short selling are two distinct financial practices that have different implications for the stock market and individual investors. While short selling is a legitimate market practice that can be used for hedging and investment, illegal naked short selling is a prohibited practice that can harm companies and their shareholders. It is important for investors to be aware of the difference between short selling and illegal naked short selling, and to make informed investment decisions based on accurate information.