What is short selling? Is it legal

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You might have heard this word quite a few times due to the Adani vs Hindenburg news. So what is Short Selling? Is it legal to do short selling?

What is Short Selling?

Short selling is selling a share which you do not own. It is done by borrowing the share and selling it, in the hopes of buying it at a cheaper price to make profits. This is the opposite of buying and selling shares.

Let me explain with an example. Let’s say you saw a company called “A”, and studied its financials, as you were interested in trading for the stocks. But when you researched you came to know that Company “A” is not doing good, and might incur a loss in the near future, so you decide to Short Sell the shares of company “A”, at a price of Rs 400 a share. This was done by you in the hopes of buying it at a cheaper price at a later date.

You use the margin allowed by your broker to borrow money and short-sell the stocks of company “A”. You sell the Stocks of company “A” for Rs 400 per share and buy it back for Rs 200. In this case, you make a profit of Rs 200 per share. But if your calculation is wrong and the share price goes up by Rs 100 to Rs 500, then you incur a loss of Rs 100 per share.

Is there a limit?

There is no such limit on how long you can hold the short position, but the longer you do, you have to pay the interest for the money you borrowed from your broker and maintain your margin with the broker. Short selling is best if you are sure the prices are going to fall. Because you have to pay interest and broker commission on the trade, the value of the trade should be good to make a profit.

It is best in the Intraday scenario (buy and sell on the same day or vice versa), where you would not have to pay any interest., though you have to pay the commission of the broker.

You can also short-sell if the whole market is going down for a specific reason, so some stocks will be affected due to that. In this scenario, you can short-sell the stocks and buy them at a lower price. After holding the stock you bought you can sell them when the share price has risen. You can make profits by selling also. Though this involves high risk please be careful.

Is short selling legal?

Yes, it is legal, all classes of investors, retail or institutional investor are allowed to do Short selling. Just keep you have to settle it by buying the stocks, if you don’t settle the sold shares, the buyer will not receive the shares you sold. In that case, you have defaulted and you have to pay the penalty. It is just a risky method of trading, it involves more risk than buying and selling stocks.

Hope you understand the meaning of Short selling

About Post Author

Girish

Hello Guys I am a website developer by profession but is always keen on learning new things. I have been investing in Mutual funds, stock market for the past few years because of which I have gained good knowledge. I started my entrepreneur journey in 2019 which lead me to learn more things as I am moving forward. I always love to share whatever I learn. Always had a craze for cars from my childhood, which inspired me to start this website.
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Girish

Hello Guys I am a website developer by profession but is always keen on learning new things. I have been investing in Mutual funds, stock market for the past few years because of which I have gained good knowledge. I started my entrepreneur journey in 2019 which lead me to learn more things as I am moving forward. I always love to share whatever I learn. Always had a craze for cars from my childhood, which inspired me to start this website.

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