Short selling is a
form of speculation indulged in by day-traders/ margin traders. Generally
people buy something first, like stocks, currencies and commodities, hold them
fore some time till the price goes up and sell the same at a profit when the
price indeed goes up.
Short selling is
selling something, without owning the item in the first place. The people who
indulge in this practice are called short-sellers. It is based
on the expectation that the price will fall and the same shares could be bought
at a lower price. The motive behind short selling is to speculate on the price
movements and make a profit therefrom. It is practiced during bear market conditions.
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| Short Selling Concept |
How it works?
Mr.X expects the
stock markets in general or the price of Infosys Ltd., in particular may fall
and sells 50 numbers of Infosys Ltd., shares say at Rs.1000 a piece. At that
time the market price of the scrip was Rs.1038.95. As he had expected the price
of the share fell to Rs.975 during the day. After the price fell, Mr.X bought
5o numbers at Rs.975. Thus by the end of the day Mr.X’s positions got squared
off and he made a profit of Rs.1,250 on the price difference of Rs.25 a share
on 50 numbers of shares.
Risks involved:
The above example
might have presented a rosy picture and one may be tempted to practice it, but
it is a dangerous game. In India short-selling is sought to be discouraged by
regulator, SEBI. In case the short-seller is unable to square off the position
the same day on account of the price moving up rather than going down, then
there are stiff penalties imposed besides paying the price difference.
Lets study the following Example:
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| Short Selling Example Infosys Ltd. |
In conclusion, indulging in short-selling
strategy as a part of day-trading/ margin trading is highly dangerous and
must be avoided.
