subject: The Benefits of Naked Short Selling! [print this page] The Benefits of Naked Short Selling! The Benefits of Naked Short Selling!
This is illegal, so let's keep that in mind. You can't devise a trading system or plan a CFD trading strategy around this.
What is Short Selling?
By referring to short selling, I'm making reference to a speculative play on a stock (specifically, betting on the stock price going down), rather than short selling for hedging or market-making purposes. Short selling essentially involves selling a security you don't own (e.g., a share) at a high price, with the end target of later buying it back in the market at a lower price. The difference in these prices would be your profit.
What is Naked Short Selling?
Naked short selling differs from short selling in the fact that with naked short selling you can short a share without having to look for investors ready and prepared to lend it to you, which means that you can short the company well in excess of floating shares or available liquidity in that stock.
Benefits of Naked Short Selling
So the most obvious benefit to the day trader is that you don't need to borrow shares to initiate positions which implies a reduction in cost and ease of trades. One other benefit is that short selling frees cash. Short selling $5,000 worth of ABC stock gives you $5000 in cash. Assuming you have other stocks that your stockbroker can sell to make up for your mess if ABC's price goes through the roof, this cash can be utilised to buy other stocks (leverage) or even possibly taken out and spent on whatever you want (not recommended since you'll have to buy the XYZ stock back eventually).
There are naturally plenty of drawbacks and risks involved in naked short selling, and it is not recommended that anyone pursue this trading strategy (not to mention that it is unlawful in most regions of the world) unless they are fully aware of these drawbacks and risks. The benefits naturally are that you gain directly from a decline in the price of the stock being shorted and, depending on the margin requirements (i.e., how much "collateral" you must post to initiate and maintain the position, particularly if the price of the security goes up), you may actually not have to put much capital up to enter into the short transaction. Therefore, if things really go your way, you could effectively gain a considerable return without putting up much of your own capital.
Of course, this doesn't mean that your capital isn't at risk with shorting. As the share price moves up (i.e., against you), you will typically receive a margin call from your broker requiring you to post additional cash to your account. As you appear to be aware, while the rewards of naked short selling are potentially high, so are the risks.
