Short selling in the stock market in India, is the practice where an investor sells shares that he doesn’t own at the time of selling them.
They sell them in the hope that the value of these shares will decline, and he will profit by buying back those shares at a lower cost.
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Many people mainly those who are new in trading become uneasy when they hear about shorting. I think they don’t have a clear understanding. In this article, I will explain the shorting of stock.
Why Shorting of shares?
Short selling of a stock is used to make a profit when the market falls. When you buy a share and if it goes up you make money. Same when you will short (sell) a share if it goes down you will make a profit in the stock market.
You may ask how do I sell a share that I don’t have?
The answer is you borrow the share from your broker and sell it to someone else.
Your broker has it in inventory or they borrow it from another Broking Firms, they give you the stock as a loan to you for sale to someone else. This done automatically and instantly when you place an order to short a share.
If once you have Shorted the share (by borrowing it ) you must return borrowed stock back to your broker. you do it by placing a buy order for that stock. Once you buy the stock then its returned to the broker automatically.
Example of Short Selling of Shares:
You decide that Stock XYZ is trading at ₹50 is about to go down. so you want to short let say you have sold ( by borrowing ) 100 share of XYZ at ₹50.
And if the price of XYZ goes down for you let say that XYZ comes down to ₹45 At ₹45 you decided it will not goes down much further, so you have bought 100 shares of XYZ at ₹45.
Now you think you shorted ( or sold ) the stock at ₹50 and bought it at ₹45 so you made ₹5 per share in profit i.e. a total profit of ₹500/- by shorting of stock.
- Remember you can lose money if the stock goes up when you place a short sell. So properly prepared when entering in the stock market for short sell.
- The point is don’t limit your self to making a profit in only one direction when the market is crashing you need to be shorting for making a profit.
Point to keep in Mind while short selling a share
Short selling of share is very risky especially for beginners who don’t have much experience in the Indian Stock market. Please keep the following point in your mind while shorting the stock
- Any investor can perform short-selling of shares.
- Short selling is riskier than holding a stock for a long time. Because in short selling there is no limit on how much money you can lose.
- Short selling can give you a nice profit when prices of stocks go down.
- Buying shares is less risky than short-selling of shares.
What is Risk with Short Selling?
The main risk with short selling is an infinite loss. There is no limit on loss in the short-selling of a share.
If an investor buys a share they will lose only money invested by them. As an example If an investor bought a share of XYZ at ₹500, they will lose maximum ₹500 because the price will not go down to lesser then ₹0. In other words maximum, any stock can go down to ₹0.
However, If an investor short sells a share, theoretically they can lose an infinite amount of money because a share’s price can keep rising forever. As an example, if an investor short sells a share of XYZ at ₹500, and the price rose to ₹2500, the investor will lose ₹2000 per share or even more if the price will keep rising further.
***** Always keep in mind when you short stocks You Should buy share same day otherwise it will go in the auction****