[danielsoneg]

Well, the problem is less that there are more shares of a company for sale than currently exist and more that it can generate high levels of unrealistic downward pressure on a stock. With a normal short sale, there is some balance between the long and short side - that is, you can only short so much before the longs start buying again and stop the downward price movement, and there are only so many people willing to lend stock to short. Once the supply is gone and the price is in balance, you can't continue to short the company and the downward price movement stops, theoretically having incorporated negative market sentiment.

With naked short sales, you're removing the supply restriction, making it possible to continue to pressure the stock downward beyond where it should go in a balanced market. This sort of pressure can cause a panic among investors in the company and become a self-fulfilling cycle - once a company's stock is pushed below a certain level, many investors will dump the stock, regardless of the fundamentals of the company. It's not a cheap maneuver, but it's potentially phenomenally profitable for the people committing the short, and it's totally devastating to the company under attack. It also doesn't represent balanced market sentiment, nor the actual value of the company, and the company can be forced to take dramatic measures due to circumstances for which it wasn't to blame. It's a potentially highly destructive practice and banned for a very good reason.

[jamesseda]

Moral equivalent is, If you knew a self employed guy needed to sell his boat to keep his mortgage current, and you bought similar boats and sold them below cost so the guy would go into foreclosure and then you bought his property.

[ewanmcteagle]

This is not the same. Once a company has sold stock it does not gain money from the ups and downs of the market. If it made agreements contingent on its stock maintaining a particular value then it has chosen a separate risk. A company cannot go out of business because its stock price is low. It can be bought by others but this also does not drive it out of business.

[pbhjpbhj]

>It can be bought by others but this also does not drive it out of business.

If the company is now worth $1 and owns anything of value then it's going to be bought and asset stripped. It may not actually be out of business when it gets run down by short sellers for their own profit but it's effect is going to be pretty much the same - unless there's suddenly a lack of greedy business prospectors :0)

I suspect that the company isn't really going to be able to raise new capital any longer either (or will find it very hard) but don't know enough to confirm that.

[danielsoneg]

Yeah, cost of capital is definitely a concern, for two reasons:

First, most companies fund new ventures via loans, etc., and the price of a company's stock and the company's overall valuation have a big impact on the terms a company can get on a loan - both how big a loan they can get and at what rate. Naked shorting materially worsens a company's ability to raise capital.

Second, most companies are operating on rolling credit lines - this is just a reality of doing business: Invoice Monday, get payment Wednesday, bills are due Tuesday. A company's stock dropping dramatically can cause these credit lines to be yanked, which can demolish otherwise solvent businesses.