Short Selling

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.

19 Responses to Short Selling

  1. Pavan Dixit says:

    Hi Admin,

    I really enjoyed reading your article and question/answers.

    One thing want to add or ask. how does the trader/investor get access to shares to sell if he/she does not own it? I understand concept of buying low and selling high, but when used vice versa like selling high and buying low when the shares are not owned, how does the investor does it? does he have to borrow it from the broker? how does that actually happen? are these orders (short sell) placed over the phone, f2f or after communicating with broker? or how does even investor know that broker does have those shares in his account? It is a little detailed question, but would be helpful if you can answer it.

    Thank you

    • admin says:

      You have to buy them before market close on same day in intraday trading. Most of the brokers automatically square off your intraday oders ( Buy/Sell the stocks) at some fixed time before market close. If in case you are not able to buy the stocks due to any reason (Stock hitting upper circuit) then there is another mechanism of auction to deal with such scenarios.This in itself is another topic to be dealt with. However you do not have to worry about this as chances of this happening are very rare.

  2. Narasimham says:

    Hello Sir,
    Your answers are quite informative to the beginners and thanks for the same.Could you please clarify as to whether a trader can enter the price lower than the market price while buying?

  3. Shridhar says:

    being a beginner in intra day trading which are the best indices & companies to go for.I have only Rs.1200 in my account,so thought of trading but don’t know how to trade,which indices to choose for lesser amount or units.
    I need to go for least share prices like 5,10,20,30, rupees. which are the commodities i need to go for please explain me.

  4. rajiv ranjan kumar says:

    Thanks for helping beginners.

  5. rana says:

    sir,
    can i buy same stock for delivery and intraday/f&o on same day

  6. Piyush says:

    Hi Sir,
    I wanted to know if I short sell some stocks and at the end of the day if I end up getting zero buyers for my stocks then do I need to wait for customers the next coming days?

    • admin says:

      Hi Piyush,
      You are not likely to face this situation if you are trading with smaller no. of stocks
      However in case of dealing with very larger volume,you might come across such scenario.This usually happens when many traders have shorted the same stock in larger volume and are buying it back due to price increase.
      In such a scenario your brokerage firm can close out the your position
      any time during the market hours if it feels that the stock is hard to buy in the market.I hope this answers your question.

  7. Aslam says:

    Hi admin,
    You are really doing good job, thanks for sharing your thoughts.
    I have a query regarding finding right price to buy a stock. And also how to find support and resistance level by graph..? And the selling price of a stock. I know this is simple to ask but complicated to answer. Please don’t mind i am new to trading. Thanks Aslam.

    • admin says:

      Hi Aslam, You have asked a very difficult question for which everyone is trying to find an answer.I will recommend you to pick up few stocks from different sectors eg. Pharma, IT,FMCG, Banking etc.
      Look at the past history of these stocks and then follow these stocks for few months without putting your money into them.

      This will help you in understanding the stock market and will give you an idea about the price at which you can buy those stocks.

      Since you are new trading,one word of caution – Please do not put your hard earned money directly into market.Instead try to learn in the initial months and then start putting your money, once your are get a hang of it.

  8. viken says:

    Hello Admin, can you please tell me whether Short Selling, FNO and Intra day are speculative Buisnesses?

    • admin says:

      Yes Viken , these fall into speculative business as you bet your money on certain speculation which has some amount of risk and reward associated with it.

  9. Thirumalesh says:

    Dear Admin,

    Thank you very much for all you efforts to help beginners.

    I came to know a lot of things through this website as a beginner. A recently took a demat and trading a/c..Just about to start investing..

  10. admin says:

    Hi Vaibhav,There are some brokerage charges and other charges which are levied upon a buy or sell transaction.However Rs. 300 is a very big amount to be deducted as part of these charges.
    Check the contract note sent to you by your broker on your mail -(A contract Note is a confirmation of trade done on a particular day) it will show all the charges.
    If the things are still not clear check your trading history online which will surely give you an idea where your money has gone.
    I would also advise you to refer to this article http://tradebeginner.com/common-mistakes-to-avoid-in-the-stock-market/.
    It will help you to understand some of the mistakes done in Stock market,so that you do not loose your hard earned money

  11. vaibhav singh says:

    hi, i have bought some shares of some 4 corporates, and left it on delivery basis, at that time my cr balance was 7828rs after 3 days i shorted a single share which i bought and made profit of 50rs and rest left it till now, yesterday i checked the bill sent to me by my broker stating that the credit blnce is 7551rs, is it possible that without making any transactions it gets deducted to abt 300 rs approx. as im a beginner plz help me on that. thnks.

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