A market transaction in which an investor sells borrowed securities in anticipation of a price decline and is required to return an equal number of shares at some point in the future and in Indian context it is same day is called as short selling. In layman terms it means that you can sell the shares not held with you and rebuy them with in the course of the day and transaction is finished same day.
The payoff to selling short is the opposite of a long position. A short seller will make money if the stock goes down in price, while a long position makes money when the stock goes up. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares.Thus at the end of the day nothing outstanding is standing against your name. If you sell a stock you don't own, you are selling short. (Yes, it's legal.) You are now short in the stock. Short selling just like long buying is essential for proper functioning of the stock market. It provides essential liquidity which in turn leads to proper price discovery.
For example, Ram thinks during the course of the day Reliance will fall and despite not holding the shares he can sell Reliance for intraday trading. He sells short 100 shares of and buys back 100 shares of Reliance before the end of the day and difference of both is pocketed (less transaction cost) by Ram and broker enjoys additional brokerage generated despite not owning the stock.
Contingencies
Let us say you expect some securities may go down from the current levels and so you decided to short that particular stock. If the stock prices move as per your expectation, you buy the stock few percentages down your shorting price and make the delivery of your stock on or before the given time frame to the buyer. This is short covering.
It can happen that stock price did not move as you expected. So you may have to buy the stock higher than your shorted levels and it is termed as short squeeze where you are forced to cover your short to minimize your loss.
Points to Remember about Short Selling in India
The payoff to selling short is the opposite of a long position. A short seller will make money if the stock goes down in price, while a long position makes money when the stock goes up. The profit that the investor receives is equal to the value of the sold borrowed shares less the cost of repurchasing the borrowed shares.Thus at the end of the day nothing outstanding is standing against your name. If you sell a stock you don't own, you are selling short. (Yes, it's legal.) You are now short in the stock. Short selling just like long buying is essential for proper functioning of the stock market. It provides essential liquidity which in turn leads to proper price discovery.
For example, Ram thinks during the course of the day Reliance will fall and despite not holding the shares he can sell Reliance for intraday trading. He sells short 100 shares of and buys back 100 shares of Reliance before the end of the day and difference of both is pocketed (less transaction cost) by Ram and broker enjoys additional brokerage generated despite not owning the stock.
Contingencies
Let us say you expect some securities may go down from the current levels and so you decided to short that particular stock. If the stock prices move as per your expectation, you buy the stock few percentages down your shorting price and make the delivery of your stock on or before the given time frame to the buyer. This is short covering.
It can happen that stock price did not move as you expected. So you may have to buy the stock higher than your shorted levels and it is termed as short squeeze where you are forced to cover your short to minimize your loss.
- In India shorting is only possible in Nifty stocks in futures market. You cannot short stocks and hold your shorts over night that is not traded in futures market. This is not the case in other World market especially NASDAQ. You can short any stock you wish and buy back at later date.
- Mutual Fund houses in India are not allowed to short the stock and they can only trade buying and investing majority of their money. They cannot even remain liquid below certain percentage of the total assets and so when market is going down and even if the fund managers knows, he cannot do anything.
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