The U.S. Securities and Exchange Commission (SEC) is ordering a targeted ban today on "naked short selling," which is designed to cause panic on the stock market.
Sterling Jenson with Wells Capital Management says a naked short sale is when someone exploits loopholes to sell a stock they don't own. It's designed to make a company's stock drop, causing panic. Then the sellers buy the stock at super cheap prices, making a lot of profit.
In legal short-selling, a broker lets you borrow their shares, which you sell with the hope that you'll be able to buy the stock later at a cheaper price to give back, keeping the difference as profit.
The SEC has put a naked short selling ban in place on targeted companies such as Freddi Mac and Fannie May as a protection. The reason: if people panic on these companies, it causes problems for the rest of the U.S. financial system.