Here we will discuss What is Short Selling. We will try to keep it simple. If you read this article you will get all the important information about short selling.
If someone tells you that he/she invested 2 thousand rupees but he/she lose 1 lac rupees then is you think that he/she is telling lie.
You will think how can this is possible.?
Most of you may be don’t know that you can earn money also while the share market is falling.
We think or we know that if our share price grows high then only we can earn money from it. But it is not mandatory.
If the share price is falling then also you can earn money by short selling. So here we will also discuss that is it profitable or not.?
First, we will talk about normal trading.
How we do normally trading (What is Short Selling )–
Let’s assume you buy a share for 100 rupees with the hope that the share price will increase. You think that you will sell that share when the price increase.
Now you need to hold that share till the time the share price increase.
You also need to track that share. Now if the share price grows high after some time then you will sell that share according to your need.
Like this, we trade in the share market. But in short selling, the opposite happens.
The concept of short selling (What is Short Selling)–
We will take a non-share Bazar example to clear your concept. Suppose you are getting an offer of a particular land to buy which you like.
And the price is 10 lac rupees. But you don’t have that money.
Now you did one thing that is- you showed that land to a very close person of yours who also like that land and wanted to buy.
But you told him/her that you can help him/her to get that land for 15 lac rupees if he/she pays 10 lac rupees in advance to you.
Now that person is agreed to give you 10 lac rupees for one month and after that, he/she will take that land.
But the land is not yours so how can you sell that one to your closest one.
In that case, first, you buy that land for 10 lac rupees and handed over that land for 15 lac rupees.
Here you gaining a profit of 5 lac rupees and here you did one type of short selling. But remember this is just an example.
Here you sell a thing which is not yours. When it’s time to deliver then you buy it and deliver it to another buyer.
This is the original meaning of short selling. This same thing happens in the share market also in short selling.
Assume that, the price of a share is 100 rupees in the morning. And you think that the price of that share will decrease in the afternoon.
So you sell that 100 rupees share in the morning and wait for the afternoon.
Now assume that the price becomes 90 rupees in the afternoon. If you buy that share in the afternoon then you are gaining 10 rupees as a profit.
But if the price goes high and if you buy after that also then you will be at loss. You can lose or you can win here also like normal trading.
Now there must be some specific question in your mind. Like how can you sell a share which is not yours or you never buy that share before.?
How you can do short selling?. Let’s solve all these questions.
How you can do short selling ( What is Short Selling )–
There are two mechanisms in short selling. The first one is INTRADAY and the other one is SHORT-TERM. Now, what happens in INTRADAY.?
Intraday short selling ( What is Short Selling )–
You have to buy and sell your share within a day.
Let’s assume that the price of a share is 150 rupees in the morning and you think that the price will decrease after few hours.
So now you sell that share at 150 rupees and wait for some time. After that when the price falls then you buy it.
Let’s assume you buy it at 120. So your profit is 30 rupees.
Here you did the exact opposite of a normal transaction. In a normal transaction, we buy first then we sell but in short selling, you sell a share first and then buy it back.
But you have to do it within a day.
Now you are thinking that how can you sell a share which you don’t have.? For such transactions, you need to place an MIS order.
MIS ORDER ( What is Short Selling )—
It means- MARGIN INTRADAY SETTLEMENT. You can understand that it is an INTRADAY. So you need to buy and sell both on the same day ( Market hours ).
But remember the key feature of short selling is- Sell high and when it goes Low then buy.
But please be aware that these MIS transactions are squared off by various brokers at their time slots. Zerodha is one of the best in this section.
Now the main question comes.
How can we sell a Share which we don’t have ( What is Short Selling )–
Assume that you are wanting to sell a share first because you think that will go down. Assuming that you sell 100 quantities of a specific stock.
Then generally many of the brokers will put a Minus sign from where you are selling it.
Let’s say you sold it for 150 rupees. After one hour the same stock is trading at 140 rupees and you wanted to buy then.
Now when you buy it, then it will be plus 100 quantity. Now the net effect is-0.
Because it has to be done within the same day. Because the exchange will get the information about the buying and selling in the next day.
But as we discussed before if the price goes high then you will be at loss.
If you don’t buy then the broker will buy that automatically after the square of time and will deduct the money from your account.
But still, someone will ask that how can someone allow you to sell first right.?
The answer is – our government allows it, as well as our regulatory body( SEBI), allows it.
Short-term selling ( What is Short Selling )–
If you want to do it for a short time like for 2 or 3 months then also it is possible. It is possible through the Security lending and Borrowing (SLBS) scheme.
Now understand this. If you think that price of a share will go down up to 2 or 3 months.
So today you want to sell that stock and after 2 months you will buy it back.
This scheme is available for those who have had some shares in their Demat account for a long time.
By the word Lending, you can understand that you have to lend your share to someone for 2-3 months (It’s up to you ) and he/she will give you interest for that.
But you need to have some shares in your account and you don’t want to sell them now.
In this case, you can lend your shares.
Risks in short selling ( What is Short Selling )–
- You are going against the general direction of the market.
2.Assume that you don’t buy the share in the square of time then the broker will try to buy it. But if there is any circuit on that stock the broker can’t also buy it.
Then you will be categorized as a defaulter. The stock exchange will charge a heavy penalty on you.
3.If you are doing short-term selling then it can be possible that the share price will go very very high after few months. Then you will be at a big loss.
4.There are very limited options to do short selling.
1.What is the purpose of short selling?
Short selling allows the investor to earn profit from the stock or securities when they go down in value.
Most of us know that if we invest in stocks when the market is down and if we sell those stocks when the market is high then only we can earn money.
But in short selling, we can earn when the market is falling down.
2.Is short selling illegal?
Few countries don’t allow short selling. But in India, it is legal till now.
3.Who allows short selling?
The Indian government and the exchange allow short selling in India. But many countries do not allow this.
4.Why do brokers allow short selling?
Short selling is risky but can be profitable if executed correctly. In a short sale transaction, a broker holding the share is typically the one that benefits the most.
Because the broker can charge interest and commission on lending out the share.
If you have any other questions on this topic, then please comment below.