American Stock Market, US Stock Market, American Share Market

Have you come across a situation when you knew that the share price of a company is going to fall today? If yes, then, why not profit from such a scenario by undertaking short selling. Short selling means selling shares that you do not hold in your demat account. Suppose scrip ABC Limited is trading at Rs. 150 and you expect the share price to fall down during the day. You can sell 100 shares of ABC at Rs. 150 at a total transaction value of Rs. 15000 without having shares in your account. If the price of share falls to say Rs. 145 during day, you can place a buy order of 100 shares earlier short sold by you and make a profit of Rs. 500 in the bargain.

If however suppose the share price rises to Rs. 160 and you have short sold, you will have to square up your position and incur a loss of Rs. 1000 as per the above example…

You can sell short in the stock market. As transactions are netted only at the end of the day, you have time till the end of the day to square up your position, which means to buy back shares sold by you. Short selling will get impetus once the securities borrowing and lending mechanism as approved by SEBI comes into force as in that case, you need not square up your position. You may borrow shares from lenders by paying certain fees, give deliveries to the exchange for shares sold by you and buy back when market moves as per your expectation. Once you buy back, you can deliver shares back to the lenders and make a cool profit in the bargain. Short selling has recently been allowed for institutional investors such as foreign institutional investors ((FIIs), banks etc.

Risks of undertaking short selling
• The price of the scrip may move up leading to you having to incur loss for buying back at higher levels.
• If the price moves up sharply and hits the upper price band (it means that there are no sellers and only buyers) and you are not able to square off, your position will be auctioned/closed out leading to significant losses and penalties imposed by stock exchanges.
• Short selling requires quick decisions and ability to cut losses when market moves against you. It is not a good strategy for those who are not willing to take risks.

Short selling as a trading strategy is good for those who are constantly monitoring the market and those who can take risk. Traders who have a pulse of the share market and who are able to identify an early trend can benefit from short selling.

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