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Short Selling

Reviewed by Anjaneyulu | Updated on Oct 05, 2020

Catalogue

Introduction

Short selling is an investing or trading practice speculating on the fall in the price of a stock or other securities. It's an innovative technique that only seasoned traders and investors can take on.

Traders may use short selling as leverage, and investors or fund managers can use it as a hedge against the downside risk of a long position in the same or similar protection.

Speculation brings significant risk possibilities and is an innovative form of exchange. Hedging is a more common transaction involving the placement of an offsetting position to reduce risk.

Understanding Short Selling

Short selling is a sale of a security which the seller borrows (not owns) to buy back the stock at a later date. Short selling is motivated by the expectation that the price of a commodity will fall, allowing it to be bought at a lower price to make a profit in the future.

Contrary to conventional investment capital gains, this strategy only pays off when the value of the security decreases from the date of sale to the date of repayment.

Short-selling critics say it may help spark losses in the economy and recessions. We claim that widespread short selling will cause a collapse in sales, crash the market, and harm the economy.

Opponents also argue that short selling leads to manipulation and seeks to dampen some stock values deliberately. Some also use a prohibition on short selling as a pseudo-floor on stock prices. All of these are reasons a country may ban short selling.

Short Selling in India

Soon after the ban in 2001, retail investors were once more allowed to sell short. In 2005, SEBI proposed also allowing institutional investors, such as mutual funds, to short-sell market shares.

In July 2007, SEBI released guidelines on short-selling to institutional investors. Finally, in 2008, seven years after the ban on short selling, both retail and institutional investors had the right to go short.

The SEBI has also introduced the Securities Lending & Borrowing system, an electronic, screen-based, order matching platform from which traders can borrow stocks and honour their sales. All groups of investors were approved and encouraged to participate and conduct their short sales through the system.

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