Short-Selling: What You Need to Know Now

Cramer: Uptick Rule Can Help Prevent Crashes (Video, Apr. 7)

Without the uptick rule to slow things down, it is much easier than ever to take a stock and crush it, says Jim Cramer.

To watch the video, click the player below:

Plus, don't miss these related videos on TheStreet.com TV: Cramer: Why We Need the Uptick Rule (Apr. 1: The SEC got rid of the uptick rule last summer. That was a big mistake, says Cramer. Legal raiding is important for short-sellers.) and Cramer: Reinstate the Uptick Rule (Mar. 28: Cramer says reintroducing the short-selling uptick rule would help stabilize the banking sector.).

From Ask TheStreet: Naked Shorts:

What is "naked" shorting? And why is it so difficult to prove?

There are strict rules when it comes to shorting stocks, however. One way they are broken is via naked shorting.

Regulators have no problem with conventional short-sellers if the practice is done according to the rules. In fact, regulators are among the first to say that short selling provides a necessary check-and-balance on the market. Short-sellers, for instance, are particularly good at smoking out companies that are either engaged in fraud or misleading investors.

It's naked shorting, a manipulative practice that enables traders to defy the laws of supply and demand, that regulators are trying to stop.

In a naked short sale, a trader places short bets without actually borrowing the stock first or even determining that any shares are available to borrow. This way, the traders are freed from a key check of the short-sale process -- the need to find willing stock lenders.

Read the full article.

From How Short Selling Works:

Short selling is often looked at as a nefarious aspect of trading and investing. However, it is quite legal, serves a necessary function in the securities markets and can be a valuable tool for an investor -- whether on an individual or professional level.

Short selling provides investors with the ability to profit from the decline in a stock's price, hedge positions or portfolios, manage taxes and create arbitrage positions. Since short selling is complex and operates outside of the sight of many investors, short selling is highly misunderstood. So in this installment of The Finance Professor, I will offer a primer on short selling by covering the mechanics behind the short selling process, the account requirements and the federal regulations that govern the transaction.

Read the full article.