Short selling is a method of profitting when stock prices fall.
Short selling and selling short are synonymous terms. The opposite transaction would be "buying long".
If you are "short" a stock, it means that you expect the price to go down. Short selling as a strategy has several inherent risks:
BEWARE: not all short or selling transactions are in anticipation of a downward move. If you short/sell a put option contract, that is typically a bullish to neutral prediction.
Short selling is controversial and is the subject of SEC proposals to restrict its use. A Wiki with links to the proposals and an opportunity to comment on them appears here.
A "naked" short sale, refers to a short sale in which the seller makes the deal without ever having access to the securities to begin with. In a traditional Short sale, the buyer will borrow the securities. When no securities are available the naked short-seller will show that a sale has taken place even though nothing has actually been exchanged.
Until the short-seller has bonds to deliver, the buyer doesn't have to pay. But by showing that a sale has taken place even though the goods haven't actually been transferred, a naked short-sale artificially drives a stock's price down to a level that's not reflective of true supply and demand
Many financial economists believe that some short selling is necessary to prevent prices from reflecting only the views of the most optimistic investors in the market. In doing this, short sellers moderate prices both when they are shorting and when they later cover. Nonetheless, short selling has long been unpopular with security owners because they believe it can depress stock prices. There is little if anything security owners can do to prevent permissible short selling. A broker/dealer can accept a short sale order from a customer or effect a short sale for its own account so long as it meets the following conditions:
■ It has borrowed the security or made a good faith arrangement to borrow the security, or
■ It reasonably believes it can locate and borrow the security by the settlement day, and
■ It has documented compliance with either of the above two requirements.
Some forms of short selling are illegal. When a seller sells stock short but has not borrowed the security or made a good faith arrangement to borrow the security, or does not reasonably believe it can borrow the security by the settlement day, the short seller is probably engaged in impermissible “naked” short selling.