As an economist, “shorting stock” transactions seem irrational.
As I heard them explained, you promise to sell someone a stock you don’t yet have - but only if the price is later LOW, when you buy it (to then give to them).
Why wouldn’t the FIRST person simply buy it, at the LOW price you are planning to buy it at?
Why would the first person even MAKE such a deal?
Please explain - thanks.
There is no first person. To short naked, you sell some stock you don’t have. Your brokerage puts the money in your account and notes that you are on the hook for some shares. Time passes, the price drops, you buy some shares and relieve your obligation. Or, time passes, the price rises, the brokerage makes a margin call which forces you to buy the shares to relieve your obligation.
A “naked short” position in an asset simply means you owe something which you do not own. Many people, including people who carp about naked stock shorts, have “naked short” positions in U.S. dollars, in so far as such people owe more dollars than the dollar value of the assets they own. The risk of a “naked short” position is that the price of the asset goes up before the debt is settled. Then, repayment is made with something more valuable (adjusted for time) than that which was borrowed.
For example, take your common student. He takes out a big loan when the dollar is weak to pay for worthless (assumed) educational services (the next bubble). Over the years, say the dollar strengthens. The hidden cost to the student, beyond the interest, is difference in value, adjusted for time, of the relatively dear dollars that he must use to repay the loan. Educational services are used in this example to represent a usage of funds for something that does not hedge the short position in dollars.
That's all it is. Nothing sinister.