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What is Short selling?

3 Mins 01 Aug 2021 0 COMMENT

Short selling is a trading strategy where traders sell securities that they do not own with the intention of buying them back when the price of stock falls.

Is short selling permitted in India?

Yes, it is. Indian markets have a stock lending and borrowing mechanism to facilitate this. But most traders either short-sell only as a day trading strategy or prefer to short options and futures rather than in a spot market.

How does short selling works?

Assume stock XYZ is trading at Rs. 100 per share, and you believe it’s price will decline. You do not own the stock. But you can go short on the stock and buy it back before the market closes. If the stock price falls to Rs. 90, you can buy it back at Rs. 90 and make a Rs. 10 profit per share. If it rises to Rs. 105 you can still buy it back and square off your position with a loss of Rs. 5.

Essential short selling facts

  • You go short when you expect the price of the security to fall.
  • If the price falls, you make a profit to the extent of the fall.
  • If the price rises, you make a loss to the extent of the rise.

Most traders prefer to short futures or use options rather than shorting stocks in the cash market.