What is "Naked" Short- Selling?

There has been a lot of buzz in the news about "naked" short selling because of an emergency ruling that came into effect yesterday. Stock investors in the United States are now banned from the "naked" short selling of shares in major financial firms, including mortgage finance giants Fannie Mae and Freddie Mac.

The US government acted after stock markets were battered by rumors and short selling. Short sellers have been blamed for helping to bring down US investment bank Bear Stearns earlier this year and driving down shares of Fannie Mae, Freddie Mac and Lehman Brothers.

So what exactly is short selling? Short selling involves selling shares and profiting by betting that a stock is overvalued and its priceis likely to fall.

Short sellers have to pay a fee to borrow shares, sell them, and then wait for the stock to fall, so they can buy the shares at a lower price, to return them to the lender and pocket the difference.

"Naked" short selling occurs when a person sells shares that he has no intention of borrowing. Instead of taking possession of the stock, a short seller simply asks a broker to allocate the shares, making it easier and faster for him to profit in a falling market.