What is Short Selling in Stock Market?
Trading is not just about
buying of shares at a low price and selling them back at a higher price, it’s
about exploiting the right opportunities. Given the unpredictable nature of the
market, a wise investor tries to sail through and take advantage of any given
situation, favorable or unfavorable.
What is Short Sell?
Short selling is a term used
when an investor sells the stocks that he doesn’t own or possess. That means it
is the selling of the stock with a belief that the price of the very same
stocks will fall and he will make a profit by repurchasing the stocks at a low
rate. He has to also make sure to close his position the very same day. If he
fails to cover the stocks before the closure of the market, the stocks will be
auctioned by the exchange.
Who can Short Sell?
Short selling is very much in
practice among retail investors. They can short sell according to their
convenience as and when they want. But banks, insurance companies and other
institutional investors are not allowed to short sell in India as the SEBI
(Securities and Exchange Board of India) does not permit them to do so. However,
the matter is up for consideration before the SEBI on the issue of letting
institutional investors to short sell.
Who is allowed to Short Sell?
Though the process of short
selling or selling short is pretty simple, certain things need to be kept in
mind. In order to be able to sell short, you have to first open a margin
account with a brokerage firm and maintain a certain amount or certain number
of stocks as margin. Then, your broker allows you to borrow stocks twice the
size of the amount you have in the margin account. For example, you have Rs.
50,000/- cash or stocks of the same value in the margin account, you can borrow
stocks of worth Rs.100,000/- to short sell.
When to Short Sell?
Sometimes, as a result of
manipulation, the market price of stocks of certain companies rocket sky high.
This is when smart investors short sell their borrowed stocks and wait for the
price to fall back to its normal rate. As soon as it happens, they repurchase
the same number of stocks. This presents an opportunity for an investor not
only to earn profit but also to build a robust portfolio that can withstand any
downturn. Short selling also has its own fair share of risks. So it is
important for an investor to do a thorough study and take calculated risks to
At the end of the day, all
that matters to an investor is profit. What truly doesn’t matter is whether it
comes through short selling or through regular trading formula of buying low
and selling high. At Indira Securities, we provide all time quality services to
an investor. If you are looking forward to enjoying low brokerage and unmatched
services, you can open a Demat account with us. You can also avail to our
powerful training programs on how to become a smart trader or investor.