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Although Short Selling Is Legal, Why Naked Short Selling is Illegal with Consequences

PR Newswire - Thu May 18, 7:45AM CDT News Commentary

PALM BEACH, Fla., May 18, 2023 /PRNewswire/ -- While Short Selling a stock is legal in most markets Naked Short Selling is not. Short-Selling a stock is profitable if the stock in question drops in value. Traditional investing involves buying a stock and hoping to sell it later at a higher price. Short-Selling involves borrowing and selling a stock now and hoping to buy it back later at a lower price. Technically, Short-Selling involves first borrowing shares held by other investors. That party can then sell those shares. At a later date, the shares need to be repurchased by the Short-Seller, and then returned back to the original owner who lent them. A recent article in Seeking Alpha explained: "Naked short selling involves the short selling of shares that do not exist. It is illegal—the legal way to short sell is to first borrow the shares before selling and opening up a short position. Naked short selling, or naked shorting, is the process of selling shares of an investment security that have not been confirmed to exist. In contrast, conventional short selling begins with an investor borrowing shares. Naked shorting is done without having first borrowed the shares, hence the 'naked' moniker. Naked short selling is not legal in the United States. A seller of a security is required to deliver shares of the security to a buyer promptly at settlement. Since naked shorting involves the selling of shares that do not exist, or have not been borrowed, a scenario is made possible where the seller fails to deliver the equity security to the buyer at settlement. Put simply, if shares are not available to 'cover' a short sale, the short position is said to be naked." Active companies in the markets this week include ShiftPixy, Inc. (NASDAQ: PIXY), AMTD Digital Inc. (NYSE: HKD), AMC Entertainment Holdings, Inc. (NYSE: AMC), GameStop Corp. (NYSE: GME), Beyond Meat, Inc. (NASDAQ: BYND).


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