By Saksham Garg (Banyan Tree School, New Delhi)
Short selling is a method by which one can earn profits in the bearish market.
By following this method, the exchange gives benefits to people to earn profits in a down position so that the market stays efficient.
The condition of short selling is that the seller never becomes the owner of the shares.
Short selling in India is allowed only for Intraday i.e. from 9:15 am – 3:30 pm. A person can do short selling by two methods.
Method 1 – By contacting the broker
If a person wants to short sell through a broker, he can contact him in the exchange and by providing his account number he can instruct the broker to sell shares of a company. Now when the share price falls, the seller can buy back the shares and earn the profits equal to the difference. In case the seller is not able to nullify his position before 3:30 pm, then the broker himself nullifies his position and the relevant loss or profits are reflected in the seller’s account.
Method 2- By using a software
One can do short selling by using his computer. He can do trading by installing any software.
Now, in case he is not able to nullify his position before 3:30 pm, he can either pull out himself by actually borrowing shares from somebody so that equilibrium is maintained and if he is not able to get any shares of the company by anybody, then these shares are entered in the auction where members of the exchange can buy these shares. If the members deny buying these shares, then the person who has initially sold the shares has to pay the 52-week high amount of the shares as a penalty.
Unlike India, short selling in the USA is operational the whole day. In the USA short selling can be only done through a broker. The seller has to deposit the amount equivalent to the number of shares that he wishes to sell with the broker. The broker in return can invest this amount and can earn interest. Now by the rule that market capitalization always remains intact, if the price of the share goes down because of the payment of dividend, then this dividend is given to the broker and if further, the price of the share goes down because of the bearish trend, then the seller can buy those shares back and earn the benefit equal to the difference.
Concept of Short SqueezeA short squeeze simply means when the broker does not want to continue with the seller and wants to finish the position with the seller. By doing so, the broker returns the initial amount that the seller deposited with the broker for security.
The major advantage of short selling is that you can earn money even in the bear markets. Another advantage of short selling is that you can hedge your investments to minimize risk and can offset your losses by the gains that you earn using this method.
Of course, everything comes with the risk, sometimes the market behaves opposite to your expectations which can leads to losses for example if the market is bullish and the price of the stock increased then you incur a loss equivalent to the difference.
But everyone goes by the saying- Higher the risk, higher the gains!