Short selling in stock market is selling of stocks that you do not possess at the time of selling.You might be wondering that why will someone sell the stocks which he does not owns.This is done if someone expects a fall in price of the stocks and he wants to make a profit from it.
Lets explain Short Selling using a very simple real world example:
◊ Current Price of Item A (Lets say Soap Box) is Rs.100 and you expect a fall in the price of Item.
◊ Now you sell 50 Units of Item A in the market at the current price and you receive Rs.5000(Rs.100X50) for it.You are expected to deliver these Items to the Buyer in the Evening.
◊ During the noon time,price of Item A falls to Rs. 90 and you buy 50 units of it for Rs.4500(Rs.90 X 50 units) .
◊ In the Evening time you deliver your 50 Units of Item A to the Buyer.Now your buyer has received all the 50 units of Item A (Soap Box) and you have made a cool profit of Rs.500 (Selling Price –Buying Price)
So in the Stock market it works in the same way however you do not have to deal with the delivery of stocks.You have to sell it (Going Short) and buy the same stocks (Covering Short) to complete your transaction.All else is handled automatically.
I have tried to explain the Short selling in a very basic and naive way.Exact rules and regulations might be different for different stock exchanges but the basic concept of short selling remains the same.