Short selling in the context of the equity markets is used with reference to a practice of selling securities which a person does not own when the sale is made. This is done when the price of the security is expected to fall and sellers believe that they could be bought back later at a lower price. As the sale is at a higher price and they are bought at a lower price later, a profit can be made.
Short selling is generally executed by first borrowing securities from someone who has the securities, selling them, later buying them back from the market and returning them to the lender. This is covered short selling.
In naked short selling, traders sell securities without first borrowing them. There is no certainty here that the securities will be later available for the seller to actually deliver to the buyer at the time of delivery. Naked short selling has been considered a way of manipulating the price of securities. As the short sellers can increase supply very fast, there is a rapid drop in the price of the security. Nervous investors then start closing their long positions which continues to increase supply and there is little if any demand. The short sellers are then able to easily buy back what they short sold at a much lower price.
But the chances of default in naked short-selling are also very high as the seller may not be able to buy back the securities from the market later due to a shortage. This is an important reason why naked short-selling is either not allowed in many markets or monitored closely.