Understanding short selling

Understanding short selling
Highlights

Anyone who has been observing the share market consistently at least for the past 15 days would have definitely noticed that the market has come down.

Anyone who has been observing the share market consistently at least for the past 15 days would have definitely noticed that the market has come down. Most of the prices of stocks have fallen down and so also have the indices.

For a general trader who buys and sells shares this may not be a time to earn. But someone who has an in-depth knowledge of the market this kind of a situation provides a very great opportunity to earn money very quickly and in a very short time.

It wouldn't be exaggerating if I say that there is an opportunity to earn money in just few hours even in such a scenario. Doesn't sound believable isn't it.

Well for those who know the concept of short selling this isn't a surprise. Very few people are aware of the concept of short selling.

In short selling one sells a share and then buys it back. Sounds confusing because how can we sell when we didn't buy. This is short selling.

Let me explain this with the help of an example. Suppose a trader sells a stock A at Rs 150. Let us assume that the price falls to Rs 110. The trader gets a profit of Rs 40 after buying back the share.

However, if the price increases from Rs 150 to 190 then he will have a loss of Rs 40 per share.

This concept is called short selling where in the trader sells share and buys it back at the end of the day.

The only disadvantage in this concept is it is applicable only in intraday. To carry forward the trade we need to do short selling in futures.

This concept is similar to the concept of betting. For example, let us assume that two persons A and B are witnessing a nail-biting cricket match between India and Pakistan.

Person A bets that India will win the match and fixes the betting amount as Rs 10,000. Person B bets that Pakistan will win the match.

If India wins A gets money and B loses money. In market parlance person A goes long on India and person B goes short.

When you feel the price of a stock is likely to decline you can make money by shorting the stock. To short stock or futures, you will have to sell first and buy later.

Just remember that even in a falling market you can earn money by short selling. Falling market is very conducive for making lucrative profits.

(The author is a homemaker who dabbles in stock market investments in free time)

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