The Dangers Of Naked Shorting

Naked shorting is selling shares that you do not own. It is not advisable and dangerous.

It is always advisable to open a Securities Borrowing account or a CFD account if you wish to short the market. Here is why:

1) Most people think that a long contra position is same as a short contra position. That is not true. Firstly, you cannot hold a short position for more than one day. Secondly, you never know when the stock will get halted or suspended. Once it does, you will have problems buying it back. Hence, you will incur more risk for a naked short position.

2) If you have shorted the stock and could not buy it back on the same day, SGX will buy back your shares at trade date +2. If there is enough script for them to borrow, the buying back will be automatic but always two bids higher(which is to your disadvantage). If there isn't enough script to borrow, $1000 penalty will be charged.

3) Lets say you are really unlucky and the stock remains halted/suspended until trade date +2, SGX cannot buy back your shorted shares and hence you are force to procure your shares from your friends. There will be a $5000 fine by SGX for each day of failed procurement.

The fines are pretty hefty if things don't go your way. Hope this will benefit you.

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