so in plain EngRish
am I understanding this correctly?
Short selling is:
1) You borrow 100 shares
2) you sale the 100 shares at 10 dollars each (1,000 dollars)
3) wait for the share price to drop
4) you buy back the 100 shares at say 8 dollars each ( 800 dollars )
5) you give back the shares you borrowed
6) you made 200 dollars
the only problem is... if in step 3 the price doesn't drop, but rise, in which case you end up losing money
naked short selling:
1) you skip the borrowing part, you simply tell some poor soul that you have 100 shares
2) you sale the none existing 100 shares at 10 dollars each (1,000 dollars)
3) you wait for the share price to drop
4) you buy the actual 100 share at 8 dollars each (800 dollars)
5) you deliver the shares you sold earlier to the poor soul who just lost 200 dollars
6) you made 200 dollars from thin air!
the problem is, in step 3 the price might not drop, so you simply tell the poor soul -that you tricked- that you can't deliver the shares and that they can have their money back.
is my understand correct? if it is, how can the seller get away with not delivering anything after collecting the money and keeping it for 3 days? Also, how does this effect the company stock?