Let’s first understand what short selling is in the stock market. Short selling is an investment strategy that involves selling a security that the investor does not own in the hopes of buying it back at a lower price in the future. Short selling is typically used by investors who believe that the price of the security will decrease in the near future.

To understand how short selling works, consider this example: Assume that an investor believes that the price of ABC stock, which is currently trading at Rs. 500 per share, is overvalued and will soon decrease in price. The investor decides to use a short-selling strategy to profit from this anticipated price decrease. The investor would borrow shares of ABC stock from a broker (or sell stock futures of that stock in the open market) and sell them in the market, receiving Rs. 500 per share. The investor would then wait for the price of the stock to decrease, at which point they would buy back the same number of shares they had originally borrowed, but at a lower price. For example, if the price of the stock decreased to Rs. 300 per share, the investor would buy back the borrowed shares for a total of Rs. 300 per share, thus realizing a profit of Rs. 200 per share (Rs. 500 sale price – Rs. 300 buyback price). The borrowed shares would then be returned to the broker (if they were in a derivative position, he could close Short Leg by closing the position). However, if the price of the stock increased instead of decreasing, the investor would be forced to buy back the borrowed shares at a higher price, resulting in a loss. For example, if the price of the stock increased to Rs. 700 per share, the investor would have to buy back the borrowed shares for a total of Rs. 700 per share, thus realizing a loss of Rs. 200 per share (Rs. 700 buyback price – Rs. 500 sale price). Short selling can be risky, as the potential losses can be unlimited if the price of the security being shorted increases significantly. To manage this risk, investors typically use stop-loss orders to limit their losses in case the price of the security increases beyond a certain point. Short selling can be used for a variety of reasons, such as to hedge against potential losses in a long position, to profit from a price decrease in a security, or to provide liquidity in the market. However, it is important for investors to carefully consider the risks and potential losses associated with short selling before using this strategy.

The Real Meaning of Short Selling: As we discussed above, what is short selling? Have you ever thought about what exactly happens when you do it? You start thinking negatively about the company; you think the share price should go down; you think the market should crash and you make profit out of it; you think the company rigged the balance sheet and numbers and they will fall badly; you think they won’t do well in the future. Trust me, this is how mindset gets involved: you try it, you short any stock future or any index future, and you wait for it. If the price is going up and up and up, then again you get panick and you create the thought that the full stock market is a gamble, managed by a few big people, totally fake, and you start cursing all. Think about this. Iif you create such thoughts about any person, or just imagine there is a person who is thinking so badly about you, do you think you will always help him? This is the point I am trying to make: if you think so badly about the stock market, do you think you can make money in it? There may be a counter to this point, saying that there are times when traders think well when they go long (buy side). As a trader or short-term investor, have you seen ups and downs in your portfolio wildly? So when you go too positive, it turns into a portfolio immediately or after some time, and when you turn negative, trust me, impact happens. It may not be immediately, but yes, it happens. Do try to check with people who do regular short selling. There has been a case in the international market where a trader lost $10 billion. Totally wiped out.

See, I am not saying don’t do short selling; it is part of the market. If you are a market maker, then there has to be both side positions; that is required, but the important point is what thought process you create. Doing short sales is not everyone’s cup of tea. Think twice before shorting the market. If you can manage your thoughts in the right direction, or, in other words, without having any negative thoughts, if you can handle short selling, then it’s a way you can create positions into shorts; otherwise, it’s better to stay away.

Few of you may say, “What’s wrong if really any company rigged their shares into the market? Why not short and hold position? Right? My suggestion would be that if they have done that, they will bear it, maybe not today but tomorrow. Why do you want to be part of their destruction? There are another 5000 shares available for trading or short-term speculation; you can think about that. In this way, you can have a thought.

I have met many fund managers who claim they don’t do any short selling because they don’t want to get involved in it. They don’t want to make money via short selling. It is their philosophy to make money in the right way (not by thinking about the destruction of someone and making money out of it). I also have a colleague who works for a hedge fund who believes short is the game in the market. There will always be people who will counter each other, and this will go on as a debate. You may think from your ethics and principles perspective, then take a call.

Now let me also point out that making money in short selling is not that easy. Here are a few points you may face while shorting.…

1. Unlimited Losses: Unlike buying a stock, short selling has unlimited potential losses. If the price of the security being shorted increases significantly, the potential losses can be significant. This can lead to a situation where the investor has to buy back the borrowed shares at a much higher price than what they sold them for, resulting in a significant loss.
2. Timing: Short selling requires accurate timing of the market. Predicting the future movement of a stock price is extremely difficult and requires a lot of skill and knowledge. A short seller must be able to predict the right time to enter and exit a position, which can be difficult.
3. Borrowing Costs: Short selling requires the investor to borrow the shares they intend to sell. This can result in borrowing costs, which can increase the overall transaction costs and reduce the potential profit.
4. Margin Calls: In a short sale, the broker may require the investor to maintain a certain amount of margin in their account to cover potential losses. If the stock price increases significantly, the margin may not be enough to cover the potential losses, and the investor may be required to put up additional funds to cover the losses.
5. Limited Availability: Not all stocks are available for short selling, as some may not have enough shares available to borrow. This can limit the opportunities for short selling and make it difficult to implement this strategy effectively.

Remember, if you make money from short selling, do not continue the same thought process of again shorting the market and creating a short perception.