What is short selling?

What is short selling?

Short selling is a trading strategy that involves borrowing and selling a security that you do not own, hoping to buy it back later at a lower price and make a profit. It is a way of trading with the anticipation on the decline of a security’s price.

For example, let’s say Mr. X borrows 100 shares of SBIN Ltd. from his broker and sells them at ₹550 each in the market, making ₹55,000. Later in the day, he buys back the same 100 shares at ₹540 each, spending ₹54,000. He then returns the shares to his broker and keeps the difference of ₹1,000 as his profit.

Points to remember:
  1. At FYERS, short selling is allowed only in intraday trading, which means you have to square off your position (buy back the shares) before the market closes on the same day.
  2. Short selling is not allowed in equity delivery, which means you cannot sell shares that you do not have in your Demat account and deliver them later.
  3. Any intraday short sell position not squared-off during the market hours will be due for auction settlement on T+1 day. This means you will have to pay a penalty for failing to buy back the shares and settle your obligation. The penalty amount will depend on the auction price of the shares, which may be up to 20% higher than the market price.
  4. If you wish to short sell the underlying asset or stock for more than a day, you can go for any of the following alternative ways that involve derivatives:
    1. Sell the futures of the underlying asset or the stock. 
    2. Sell the call option of the underlying asset or the stock.
    3. Buy the put option of the underlying asset or the stock.