What is Short Selling?

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.

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:

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.