We want to review shorting of stocks many people mainly who is new in the trading become uneasy when they hear about shorting. I think they don’t have clear understanding
* Shorting is used to make profit when 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 profit in the stock market. But how do i sell a share that i dont have you may ask. Ans is you borrow the share from your broker and sell it to some one 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 sell to some one 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 broker automatically.
Example: You decide that Stock XYZ is trading at Rs 50/- is about to go down. so you want to short let say you have sold ( by borrowing ) 100 share of XYZ at Rs 50/- and if the price of XYZ goes down for you let say that XYZ comes down to Rs 45/- At 45 you decided it will not goes down much further , so you have bought 100 share of XYZ at 45.
Now you think you shorted ( or sold ) the stock at Rs 50/- and bought it at Rs 45/- so you made Rs 5/- per share in profit or Rs 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 profit in only one direction, when market is crashing you need to be shorting for making profit.
***** Always keep in mind when you short stocks You Should buy share same day other wise it will go in the auction****