InvestorQ : What is short selling and how does it work as a strategy in the Indian markets?
prachi Patwardhan made post

What is short selling and how does it work as a strategy in the Indian markets?

Answer
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1 year ago


Short selling in the context of markets is all about selling stocks that you do not own (or which are not there in your demat account). In the Indian context, short selling is only permitted for intraday purposes. If the stock sold is not covered by end of the day then it automatically goes into delivery selling and you need to give delivery of shares from your demat account by T+1 date. You can either give from your own demat account or you can borrow shares from the SLBM mechanism available; either ways, the delivery has to be given. If you don’t give delivery then it goes into auction with the possibility of losses on these positions. That is the risk in short selling. However, short selling can take other legitimate forms too. Let us look at some forms of short selling in India.

Selling short for intraday purposes

Selling short via futures without underlying position in the stock

Selling short calls on the stock without an underlying long cash or futures position

Selling short puts on the stock without an underlying short futures position

When your short shares, there are other factors you need to consider:

· When you borrow shares, you pay interest on shares borrowed. Normally, harder the shares are to find, the higher the interest rate

· You normally collect dividends, but you have to pay them out to the person you borrowed the shares from

· If you have long and short positions in the same account and if short positions go the wrong way, the broker can liquidate long positions to cover margin calls

· Ideally, avoid naked shorting as it can wipe traders out. The losses can be disproportionate to your risk and that happens quite often in any naked short selling.