Short selling is the sale of the security that the seller borrows. You don’t own the security but sell it, which constitutes a short sale. Implicit in the sale is a promise to buy the securities at a later date when the company’s share price comes down. Short selling is normally carried out when the market feels the share is overvalued, and the share price is likely to trend lower later. This strategy is used to offset losses during a stock market crash. In India, short selling has a tumultuous history. For most of the 2000s, short selling was banned in India. It was reinstated in 2008 for retail and institutional investors. Even during the Covid-19 pandemic in 2020, short selling was banned from March to July. SEBI imposed this rule to control the market’s unprecedented volatility. It was felt that this strategy would depress the already reduced prices much further. Short selling is permitted on a limited scale, and not all brokers provide this option. You may be allowed to do short selling when you are doing online share trading from your online trading platform.
Is short selling profitable?
Short selling is considered a controversial strategy, and some countries of the world have banned it entirely. In India, short selling is offered by full-service brokers. They also charge a premium fee for offering this service.
You might expect that a stock value is going to depreciate. You would like to take advantage of the opportunity. You borrow the stock from your broker and short it in the market. When the stock price depreciates as you anticipated, you buy the stock from the market and give it back to the legitimate owner. You profit or lose from the difference between the selling price and the price at which you bought back the security. Technically, there is an opportunity to make unlimited losses in a short sale. Suppose the price of the security rises hugely contrary to your expectations. In that case, you may have to buy the security at a much higher price from the market to return it to the original owner.
How is a short sale executed?
- You identify a full-service broker who offers the short-selling option and enters into an agreement.
- Find a position to short sell it. The stock will be purchased at the market price, and a contractual lending agreement will be made.
- Constantly watch the price of the security that you have short-sold. Lack of attention may result in a potential loss of opportunity.
- Buy the stock back at a reasonable time.
- Give the stock back to its owner. The difference minus the fees/interest charged for the stock lending will be your profit.
Key Takeaways
You should employ short-selling strategies when you become a seasoned trader.
Otherwise, wrong judgement may result in your being exposed to a huge loss.