The ban "concerns securities that are registered on a regulated German market," a Finance Ministry spokesman said.
It also encompasses certain trades on currencies that are not used for hedging purposes, although this can be implemented in times of crisis, not as a permanent measure - a slight watering-down of the original proposals.
A previous version of the draft law had envisaged a complete ban on short selling currency derivatives.
German Finance Minister Wolfgang Schäuble on Wednesday said naked short selling had been used on a "no longer controllable scale" during the recent eurozone financial crisis sparked by Greece's debt problems.
"That's why were are banning them," he said.
Last month, Germany rocked its European partners and roiled markets worldwide by unveiling, out of the blue, a ban on naked short selling of sovereign bonds and credit default swaps.
The surprise move, by Germany's financial regulator, was introduced unilaterally and without informing other G20 countries.
Naked short selling is effectively a bet that a certain stock or government bond will go down on the markets. But unlike conventional short selling, a trader does not even borrow the stock or bond before it is traded.
The practice came under fire as the Greek debt crisis escalated. Many analysts said that such trades artificially inflated Greece's funding costs.
Critics of the practice also say it can create highly damaging volatility on financial markets.
However, most short selling takes place in London and it is not a common practice in Germany.
Defending the ban at the time, Berlin said it wished to "send out a clear signal to the markets that we want to act where we are able to ... in order to tackle excessive speculation."
The draft bill now passes to the German parliament, where Chancellor Angela Merkel's centre-right coalition holds a clear majority.