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:
- 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.
- 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.
- 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.
- 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:
- Sell the futures of the underlying asset or the stock.
- Sell the call option of the underlying asset or the stock.
- Buy the put option of the underlying asset or the stock.