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Naked Short-Selling Banned

It has finally been decided that the art of naked short-selling will be banned from now on, which is a good thing since that technique of trading is what caused the demise of Lehman Brothers and many other stocks of the financial sector.
I’ve never really been a fan of short-selling any stock even though I’ve done a handful of times. Short selling is the idea of betting against the stock, expecting it to go down in value. A trader will borrow and then sell shares of a company, only to buy them back at a lower price to return them back to the entity that they borrowed them from. With naked short-selling, the trader doesn’t worry about borrowing the share before he sells them. At that point he/she has to look around for someone to borrow the shares from. In most cases there aren’t enough shares to go around, causing turmoil and wild swings in the stock price.
Now the SEC has included a requirement that all brokers must buy or borrow the shares promptly to cover the short sale. The SEC is also considering several other ways to limit short selling. Let’s not forget that it was the SEC that removed the up-tick rules a few years ago.
The up-tick rule refers to the price of a stock has to move up in price by at least a penny before anyone else can short the same stock. That helps avoid a runaway drop in the stock price.

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