On Naked shorting of a stock https://financialh
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Posted On: 08/04/2017 6:08:05 AM
On Naked shorting of a stock
https://financialhighway.com/naked-versus-cov...t-selling/
Naked Short Selling
Naked short selling occurs when an investor shorts a stock without first borrowing the stock. In theory, an investor needs to own a stock before he sells the stock, but in some instances this practice cannot be achieved.
If the short seller of a stock does not acquire the stock prior to the required deliver period, the result is known as a failure to deliver. This type of transaction will remain open until the stock is obtained by the seller.
In 2008, the SEC banned naked short selling as a method of driving down share prices and creating negative momentum. Failing to deliver a stock and naked short selling is not necessarily illegal.
Naked short selling can create a momentum affect where a stock price tumbles if an investor can sell rapidly without borrowing against the stock.
Why Naked Short Selling Occurs
If the inventory of a stock is in limited, finding shares of the stock to borrow can be formidable. A seller may decide that the lack of availability of the stock or the cost of the borrow make creating a covered position unattractive. If there are few lenders, the interest rate that a lender could charge might be prohibitive.
Naked short sales can take place in a liquid market which may not be noticed. If the shares of a short sale cannot be obtained, the trades will fail. Failure reports are published regularly by the SEC, which might generate unwanted attention to the short seller.
When an investor repurchases a shorted stock, the transaction is referred to as “covering short positions”. Shorting a stock creates liquidity within a market place.
https://financialhighway.com/naked-versus-cov...t-selling/
Naked Short Selling
Naked short selling occurs when an investor shorts a stock without first borrowing the stock. In theory, an investor needs to own a stock before he sells the stock, but in some instances this practice cannot be achieved.
If the short seller of a stock does not acquire the stock prior to the required deliver period, the result is known as a failure to deliver. This type of transaction will remain open until the stock is obtained by the seller.
In 2008, the SEC banned naked short selling as a method of driving down share prices and creating negative momentum. Failing to deliver a stock and naked short selling is not necessarily illegal.
Naked short selling can create a momentum affect where a stock price tumbles if an investor can sell rapidly without borrowing against the stock.
Why Naked Short Selling Occurs
If the inventory of a stock is in limited, finding shares of the stock to borrow can be formidable. A seller may decide that the lack of availability of the stock or the cost of the borrow make creating a covered position unattractive. If there are few lenders, the interest rate that a lender could charge might be prohibitive.
Naked short sales can take place in a liquid market which may not be noticed. If the shares of a short sale cannot be obtained, the trades will fail. Failure reports are published regularly by the SEC, which might generate unwanted attention to the short seller.
When an investor repurchases a shorted stock, the transaction is referred to as “covering short positions”. Shorting a stock creates liquidity within a market place.
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