What is short selling - How does Short selling Work?
When we hear the name short selling, many questions come to our mind like what is short selling in the share market? How short selling works? What is the difference between Short-Selling and Intraday? How to reduce loss in Intraday etc.
Short Selling
Short selling means - Unfinished facit (Incomplete Sell) - First stock is sold for short selling, and later it is bought. Friends, the process of short selling is very fun to understand because of this concept. It is sold first and then bought, and a decrease in the stock price can also be made a profit. In general, we all know that in the stock market, a profit is made by buying and selling (selling) in the stock market.
That is, to earn profit in the stock market, buy shares at a lower price and sell them at a higher price. And thus we have to buy the stock at a lower price, and later when the share price rises it will be higher. Selling makes a profit. But in the stock market, on the contrary, there is a concept, called "sell short".
Generally, we all know that profit is made by buying and selling stocks in the stock market. That is, to make a profit in the stock market, buy the stock at a low price and sell it at a high price (buying less - selling more) thus we have to buy the stock at a low price first, and later the price of the stock increases. But profit is made by selling it at a higher price.
But there is a concept opposite in the stock market, called short selling. In this concept of short selling, even if I don't have any stock.
Still, if I want, I can place a sell order on that stock first, and make a profit. Let us know how profit is made in the stock market, it is not necessary that the price of the share will increase only then you will earn profit.
Rather, excellent profits can be made when the price of a stock falls. Yes, you can make a profit even if the price of a stock is falling, you can make a profit when the share price is falling.
You must first sell the stock at a higher price, whether you own the stock or not, and later when the stock price falls, buy it back at a lower price. In this way, when you sell a stock first and then buy it later, it is called short selling.
In this concept of short selling, even if I do not have any stock, even if I want, I can order to sell that stock first, and I can make a profit. Stock is not necessary to make a profit in the stock market. You will make a profit only if the price will increase, but a very good profit can be made when the price of a stock falls. You have to sell the stock at a higher price first, whether you have that stock or not, and later when the stock price falls, it has to be bought back at a lower price, - that way when you sell a stock first and buy it later, it is called Short Selling.
How Short selling Works
Short selling is the exact opposite of the process we usually take to buy stocks. First, we sell the stock and after that we buy it.
I will explain with an example:
Suppose a company named XYZ is currently trading at Rs 500.
Do you think this rate is (500) higher for XYZ? So, if you believe that the share of this company can fall to 450, then you can shorten it as per the example given below.
Step 1:
You sell XYZ stock for 500 rupees.
(Actually, your selling price is 500)
Step 2:
If your predictions are correct, the stock gradually lowers its price, and as you thought XYZ has a share price of Rs. 450 per share.
Estimated Price by you 450.
Here you will buy a stock at 450.
So, in the end, you sell 1 share for 500 rupees and buy it for 450 rupees. You get a profit of 50 rupees.
Short Selling is the exact opposite of normal method.
In the normal case, you would have made a profit of Rs 50, even if you had bought a share of Rs 50 and sold it when the price had gone up by Rs 500.
In both cases, the difference in the price margin is 50.
But the most important thing here is that for short sales you have to pay margin money.
You will only be allowed to trade intraday. As per BSE, any transaction on NSE should be completed within 2 trading days only.
Topics about the stock market that every investor must know:
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