There are many investing methods in stock market. Some of them or popular of them are intraday,F&O,long term,short selling etc. I think you surely understand what topic i cover in this article from the title. Let’s explain” what is short selling?” and methods or types of short selling.
What is short selling?
Usually we buy a stock from the stock market and sell it when the stock’s price is higher than the buying price. The rule of this type of investing is buy in low price and sell it in high price. It means you buy a stock from the stock market (indian free broker: zerodha, upstox) and when the stock’s price grow then you sell the stock and you will profitable.
But in short selling the rule of investing is fully different or opposite of general investing. Here investors firstly sell the stock when it is in high price and buy the stock again when it is in comparably low price. In this way the short selling investors will benefit. It means in short selling when the price of the stock decrease the investors will be profitable. Remain confusion. Understand it with an example.
When any investor assume that the price of any company’s stock will be decreased then he start short selling, means sell the stock in high price and buy it again when the price of this stock will be decreased.
We generally buy a stock in that think when the price of stock will be increasing and we will do gain. But in short sellingit is totally different. Let’s understand it with an example:
Assume that you get a pen in 5 rupees(indian currency).your friend like the pen and he also wants the same pen. So you told your friend that you can get the same pen next week in 10 rupees. You have to pay 5 rupees now in advance. Now you have 5 rs(rupees) which your friend give you in advance. After the time period (here next week) you buy the pen from seller in 5 rs and deliver it to your friend. In this way you earn 5 rs that you charge extra to your friend for the pen. Here you short selling in one way.
Means you sell something that you have not but at the time of delivery ,you buy it from seller and give it to buyer with extra cost.
Again Short selling means sell something that you have not own and in the money of buyer you buy this from the seller. Here you will benifit because in that price you sell the product is more than the price of buying.
The short selling is same like the example. Traders sell a stock today in that thought that the stock price will be decreased and then he/she again buy the stock. And the difference between buying and selling price is the profit.
Suppose stock price of ‘P’ company will be decreased at the market’s closing time. So i sell 10 share in 100 rupees and at the market’s closing time if the share price is 90 or less than 100 then i buy the stocks and will be profitable.in this way we can gain though the share price is falling or decreasing.(learn how to invest in stock market for beginners). On the other hand if the share price become high then i have to buy the stock in high price that is surely not good for me.
How short selling is done?
There are two methods of short selling.
1) INTRADAY: If you sell any stock in that confidence that it will perform bad today. So you sell the stock in its present price. And at the market’s closing time if it really perform bad today and down its share price then you buy it and the difference of selling price and buying price is your profit. You have to buy the share that you sold today, so this method is called INTRADAY.
You can loose money if the stock does not perform bad and stock price increase then you have to pay additional.
2) SHORT TERM:
If you want to do short selling for 2-3 months or more then you have to understand SLB(share lend and borrow) concept. For short term short selling you have to borrow the the stock that you want from long term investors for a time period saying that you can give him a interest for his share and return it after a contracted time. But it have a disadvantage. You have to pay the interest from your profit means your profit become less.
How you can sell a stock that you have not ?
if you sell any stock and buy it in the same day then your net position is zero. Next day when stock exchange check their list your position remain same because you do not have to deliver any stock.
If the stock price increase and you do not buy the sold stock in intraday then what happen?
In Indian stock market 3:30pm is closing time of trading . If you do not buy the sold stock before 3:30pm then broker(indian online free broker: UPSTOX, ZERODHA) will automatically buy it for you. Balance will deduct from your demat account in according of the stock’s closing price. If you have not money on your account then broker give you 2-3 days to pay neither they sell the exist stock of you. So if you do intraday short selling then buy the sold stock before market close .if you or broker are not able to buy the sold stocks of you in any reason then you declared Defaulter.
Risks of short selling:
- it is against the general stock market direction.
- if you can not buy or unable to deliver the stock to buyer then you you categorized defaulter and have to face huge penalty.