[KarlInOhio]

Can someone explain to me exactly what shorting is and how one makes money off of it?

My understanding is that you believe the stock will sell lower in the future, but how does that translate into a profit?

Let's say you borrow a stock from someone and sell it for $20. You have $20 in your pocket but you owe that stock. Later, you buy the stock on the market for $15 and return it to the original owner and you are left with $5 as profit. The most you can make is the original value of the stock if the value drops to $0 before you buy it and return it. Your loss is unlimited because the stock could go up and up and up while you are waiting to buy it to return it to the original owner.

I have no idea how the naked selling works because how can the purchaser own the stock without the share actually existing. I also don't know what happens if the original owner wants to sell the stock you have borrowed and how he gets dividends if he doesn't have it anymore.

[freespirited]

I have no idea how the naked selling works because how can the purchaser own the stock without the share actually existing.

It works because brokerage houses cheat. Transactions go through without shares being delivered. There is no certificate to back up the short sale.

I also don't know what happens if the original owner wants to sell the stock you have borrowed and how he gets dividends if he doesn't have it anymore.

There is a process called a buy-in. At any time, the brokerage can force you to cover the shorted stock if the owner "wants it back" (or the broker for whatever reason can't pretend you have a legit sale anymore, such as an audit in conjunction with litigation). The broker buys the stock in the open market at the market price and the customer is forced to cover whether he likes it or not. Part of the risk of shorting.

I am under the impression that most naked shorting is done in stocks that do not pay dividends. If a dividend is due, I would guess that it is simply paid regardless of whether it was a legit sale but since I have never done a naked short, I really can't confirm this.

[TomasUSMC]

Is it the same as if you buy one of those shorting ETFs like...
ProShares UltraShort FTSE/Zinhua China 25 FXP or something like that?

[Hostage]

See Post #44 for an answer to how naked shorting works.