What is Short Selling | Should you do short selling?
Table of Contents
What is Short Selling
What is Short Selling in Stock Market?
SHORT SELLING FEATURES
1] Short sellers short the stock with the expectation that the share price will fall.
how many ways can a short sell be done?
Shorting in the market can be done in two ways –
1] Intraday Short Selling
2] F&O Market Short Selling
1] Intraday Short Selling
Auction in Short Selling
Suppose you have borrowed 100 shares of BHEL from Ram with the help of your broker and sold it for ₹ 50. You promised Ram that I will return your shares to you by evening.But till evening you could not buy back the shares and could not return Ram either. But you have to return 100 shares.
Here you will be the defaulter. Now your broker is ready to return Ram’s shares.
This auction takes place in T+ 2 i.e. 2 days after the day you have done the shorting. All brokers are involved in this auction. In this auction, your broker buys 100 shares of BHEL and returns it to Ram.
If in the auction your broker bought BHEL stock for ₹60 and you sold it for ₹50. The difference between Selling and Buying price is ₹ 60 – ₹ 50 = ₹ 10 i.e. ₹ 1000 of total 100 shares will also have to be paid by you. Penalties are payable separately.
That is, if the broker buys these shares for ₹ 45 in the auction, then you will get 5 per share profit. But in most cases, this profit is deposited in the Investor Education Fund, not with you.
2. Future & Option Short Selling
The first type of short selling, you understood the intraday short sell which happens in the spot market or cash market. On the other hand, the other type of short selling is in the futures and options market ie F&O Market.
Future & Option Short Selling Important Points
Short Selling Purpose
No 1
At the end of the month, the share price of PNB actually fell to ₹90. Now you have bought back the shares to clear your short position.
Total Purchase Value – ₹90 × 5000 = 4.5 lakhs
Now the value of your actual investment will be –
Old Investment : ₹ 90 × 5000 = 4.5 Lakh
Profit from Hedging : 5 Lakh (sale value) – 4.5 Lakh (purchase value) = ₹ 50,000
Here you have made hedging of your investment of ₹ 50,000 Damage covered.
No 2
On the expiry of the month, instead of falling, the share price of PNB increased and came to ₹ 110. You bought back shares to clear your short position.
Total Purchase Value – ₹110 × 5000 = 5.5 Lakh
Now the value of your actual investment will be –
Old Investment : ₹110 × 5000 = 5.5 Lakh
Loss from Hedging : 5 Lakh (sale value) – 5.5 Lakh (purchase value) = – ₹50,000
In this case your guess turned out to be wrong but still you are in the same position through hedging as you were a month ago. (Current Investment Value – Loss on Hedging) = 5 lakh – 50,000 = 5 lakh
So you guys saw how by using hedging we can protect our investment from volatility.
Hedging is always done for a large investment amount. There is no point in hedging for small investments.
Risk in Short Selling
Short selling is much riskier than normal trading. In this, you trade by borrowing shares, which increases the amount of risk even more. There is no limit to the loss.
Benefits of Short Selling
Disadvantages of Short Selling
1]There is no limit to the loss. If the price of the stock increases instead of decreasing, then the investor can suffer a huge loss.
2]In Intraday Short Selling, if the upper circuit has been placed on the stock, then it can be a nightmare for the trader if the upper circuit continues for the next few days.
3]There is a heavy penalty to be paid in case of default in short selling.
4]Excessive short selling can increase the volatility in a stock.
5]It is also used as a fraud technique in the stock market.
Conclusion – Should You Do Short Selling?
The simple answer is that if you want to be successful in Short Selling, then you need very good expertise and technical analysis for this. If you are a new investor then without any doubt you should stay away from short selling.
If you do short selling without thinking, then you can suffer a lot. Therefore, new investors and investors who do not have the right information about it, they should not do shorting.
Anyway, Short Selling is a hedging method and not any trading.
Friends, today you understood what is Short Selling in Share Market, Short Selling meaning and advantages and disadvantages of short selling.
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