Short Selling Stocks: Features, Risk and Benefits

1. What is Short Selling Stocks?

Short selling is the practice of selling shares in the open market which you do not own. Short sellers borrow shares from a third entity, to sell them in the open market at a higher price, only to buy them at the lower prices later.

Short selling is used to make profits when your view of a particular stock’s future price is negative. In equity cash segment, short selling stocks is only allowed for intraday trading. This means that for actual shares of companies, you have to buy the shares on the same day as you sold them. Shares sold today cannot be bought be back on the next day or later day.

The ‘sell’ position is squared off at the end of the day, and you will be forced to buy the shares at whatever is the prevailing rate of that stock. If you feel that a particular stock’s prices are likely to go down over the period of a few weeks, then you can take help of derivative instrument such as futures and options for selling the stock futures today and buying the same at a later day to make profits.

Features of short selling Stocks

1. Short selling in intraday is possible because trades get settles on T+2 days

Practically short selling stocks in intraday trades is possible because the clearing corporations associated with the stock exchanges settle all transactions after T+2 days. This means that the transactions done today are matched up with the records f the stock exchange two days after the trading day. As a result, the buying and selling gets adjusted without there being any delivery of shares.

2. Short Selling Stocks makes the markets safer

When a particular shock undergoes short selling, its prices remain somewhat closer to their intrinsic value. In a stock where there is no short selling and only long positions, a stock market crash leads to a sudden drop in the stock prices, which lead to massive wealth destruction. Short selling keeps the stock from getting overvalued.

Benefits of Short Selling Stocks

Basis of this preliminary information, if you think that you are ready to do short selling in the market, then here are a few advantages that you can cash on while creating short positions

1. Short Selling Stocks helps you make money in the falling markets

Most of the traders in the market which includes sort to medium term are only obsessed with long positions or bull markets, even when they own shares which can be sold at higher prices to earn profit by buying them later at lower prices. This approach, in which they only look for rising stock prices, makes them blinded to the benefits of short selling.

2. Short Selling Stocks is used as a hedge

Stock traders who want to secure their long positions in the market or mitigate their losses, often take help of short selling, to consider the eventuality of stock prices falling. However, there is a cost involved in hedging through short selling, but at the same time, there is a scope of profits if the markets move in the opposite direction.

3. Short Selling Stocks boosts liquidity and gives an opportunity to traders to earn

When you short a stock, you make it available in the free market for buying it, hence boosting the liquidity of the particular stocks. While this helps a trader, who wished to buy the stock, it also gives you an earning opportunity in the markets due to the negative price fluctuations.

If you are new to trading and don’t have enough experience of market trends or don’t know about technical analysis for intraday trading, it is better to take guidance from a SEBI registered investment advisor. There are various SEBI registered and renowned investment advisors like CapitalVia who can help you in guiding you with Intraday trading by providing research-based advice and levels for intraday trading. These strategies can be beneficial but whenever you invest or trade in the market your capital is at risk. It is always better to enter the market with proper research and guidance.