Covered shorting involves short selling securities that have been borrowed from a third party lender, while naked shorting sells securities without actually borrowing them first, essentially selling shares that do not exist with just a promise to deliver them later. The key difference is that covered shorting ensures the short seller has located the security to deliver by the future date, while naked shorting sells shares without identifying the source, taking on additional risk if the security cannot be obtained to deliver.

1. Difference between covered and uncovered shorting Covered Shorting Short Seller Lender Market Naked Shorting Short Seller Lender Market A shorter sell the actual securities that he borrowed from a third party A shorter sell securities that he borrowed from a third party with a promise to deliver them on a later moment Fee Securities 1 1 Sell Price Sell Price Securities 2 2 Fee Securities 3 3 Securities 4 Buy Price Securities 4 Buy Price Securities 5 Securities 5 Securities