Contents
What is Short Selling?
Short selling is used when an investor believes that the share market will go down in the near future and wants to profit from it. In normal buying, an investor or trader buys shares first at a lower price and sells it at a higher price, whereas in short selling, he sells the stock first at a higher price and buys it later at a lower price. One can earn profit through short selling in the bear market.
e.g., Suppose there is a stock called ABC, which is trading at Rs 1000. Mr. X is a trader who believes that the price of ABC is going to fall. He sells 100 shares of ABC at Rs 1000. After some time, ABC’s price falls from Rs 1000 to Rs 990, and then Mr. X buys those 100 shares at Rs 990 and thus earns a profit of Rs 10 per share. So short selling is a method through which profits are earned when the price of shares falls. If any trader does short selling and the shares’ price rises, he will make a loss.
Can we do short selling in intraday?
The concept of short selling is only applicable in intraday. In intraday short selling, the short seller sells the stock first earlier in the day, and then to make a profit, he has to buy it back at a lower price later in the day. If, however, the stock goes up, he will make a loss. Therefore, Stop Loss becomes important in any short selling trade.
If you hold the stock overnight or forget to buy the stock on the same day, or you cannot buy those stocks for any reason, then you will become a defaulter, and for this, you will have to bear some charges. This situation is called a short delivery.
Short delivery
In the Indian Stock Market, settlement of stocks takes place according to the T+2 cycle. If you buy the stocks on Monday, those stocks will come to your Demat account on T+2, i.e., Wednesday. And the person who sold those stocks to you will also get money for those stocks on Wednesday.
You have to give the stocks to the person who bought those stocks from you. This is known to the stock exchange on T+1 day, i.e., on the second day of the day, you sell those stocks. When you do short selling on intraday, i.e., sell the stock first and buy it later on the same day, then the stock exchange does not know your obligation. If you cannot buy those stocks on the same day, then the stock exchange knows your obligation on the second day, and you will become a defaulter. But the stock exchanges will not let it affect the person who bought those shares from you. The stock exchange will buy the shares from the auction market and give it to the buyer. And then the price at which the stock exchange bought the shares from the auction market, and the price at which you sold these shares, you have to pay the difference between these two.
e.g., If you had sold these shares for Rs 100 each and the stock exchange bought the shares from the auction market at Rs 105 and gave it to the buyer, then you have to pay the difference of Rs 5 per share. Also, the stock exchange charges you a penalty for this default.
If you want to sell and hold a stock, you can do this only through futures and options contracts. But there is a limitation, the futures contract of all stocks are not available. There are some stocks whose futures contract is available; you can short the futures contract of those stocks and hold it till expiry.
Concept of SLB Account (Securities Lending and Borrowing)
If you want to do short selling for a long period in the cash market, then you can do it through SLB (Securities Lending and Borrowing) account. Long Term shorting of stocks happens through SLB Account, wherein the short seller borrows the stocks for a particular time period at a particular interest from a stock lender. After the time period, he has to buy back those shares at market price and return to the lender along with interest. SLB has not become so popular in India, and the liquidity is currently very low in it. Very few brokerage firms in India provide the facility of the SLB account. Through the SLB account, you can do lending or borrow only in the shares of some selected companies.
Conclusion
There are too many risks involved in short selling. If your analysis is very good if you are confident that these shares will go down and your reasoning is excellent, it can be done sometimes. But to make it a habit, that is, I will do short selling only, it will be risky.
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