Short selling (also known as shorting) is not very popular among Indian retail investors and I get lot of questions about short selling. So let me try to explain the concept of short selling in very simple language.
Short selling (also known as shorting) is not very popular among Indian retail investors and I get lot of questions about short selling. So let me try to explain the concept of short selling in very simple language.
Short selling is when you sell a stock but you don’t own that stock. The reason you can sell those stocks without having them is because you don’t need to deliver them immediately. You can deliver them to the buyer after some time period, usually end of the current month or few months down the line depending on your contract.
Pretty much a definition; now let us take a very simple example from our shopping experience to understand the concept of short selling.
Short Selling Example
Let us say you are planning to buy some furniture from a showroom. When you step in, you realize that they only have few options for you to choose from the display area but they have lot more options to choose from the catalogue. The shop owner or sales people tell you that as they have limited space the option they show in the book is ready to be delivered in godown. You selected one of such furniture, which is available, but not in the display. You pay for it and they tell you that furniture of your choice will be delivered to you within one week.
Sounds pretty normal.
Now let us look at the same transaction from the perspective of the showroom. They actually do not have the exact furniture set of your choice ready in the show room and most possibly not in godown as well but they have actually sold the same to you. They have taken some time before they will actually deliver those items to you and within this timeframe they know they can manage to get it constructed and deliver.
So they actually sold good they don’t have it but they know they will be able to get the goods created in market and deliver in the stipulated timeframe.
How Short Selling Works in Market?
The same concept of shorting or short selling works in market especially futures market. You actually do not need to deliver the stock you shorted the same day but you can deliver that on the settlement day for your cycle period and this period is normally last Thursday of particular month.
Let us say you expect some securities may go down from the current levels and so you decided to short that particular stock. If the stock prices move as per your expectation, you buy the stock few percentages down your shorting price and make the delivery of your stock on or before the given timeframe to the buyer. This is short covering.
It can happen that stock price did not move as you expected. So you may have to buy the stock higher than your shorted levels and it is termed as short squeeze where you are forced to cover your short to minimize your loss.
Points to Remember about Short Selling in India
- In India shorting is only possible in Nifty stocks in futures market. You cannot short stocks and hold your shorts over night that is not traded in futures market. This is not the case in other World market especially NASDAQ. You can short any stock you wish and buy back at later date.
- Mutual Fund houses in India are not allowed to short the stock and they can only trade buying and investing majority of their money. They cannot even remain liquid below certain percentage of the total assets and so when market is going down and even if the fund manager’s knows, he cannot do anything.
Hope this helps fellow Indian retail investors understand short selling. Share your views in comments below.
According to a SEBI circular in 2013, Mutual funds are allowed to Short Sell. Is there anything that I am missing.
https://www.business-standard.com/article/markets/sebi-allows-short-selling-by-mutual-funds-107111701027_1.html
Don’t go by the headings. Read the details. I quote from the article:
Moreover, in the cash market, we can’t even short sell and so how can mutual funds short sell.
Dear sir,
Sir I wanted to know about offline phase and what is it. can we also put delivery sell order for the next day in offline phase of stock.
Sayeeda
Thats just an option with some brokers to place your order before the market opens or after the market close.
Can you please add information for below:
1. Is shorting in cash segment possible for brokers or specific group only or for people like us who have an a/c with MOSL ?
2. If I enter into a sell contract of some stock that I dont possess, until when will I have to buy it for a set-off & accumulate the difference as profit ?
3. In the (2) scenario above, what happens if I do not buy it until the prescribed limit ?
1. Shorting in cash segment is possible but you have to cover your short position the same day and you cannot keep your short positions open in cash segment.
2. Sell contracts means you are in futures market and so you have to buy the stock before the expiry or if you want to roll over your short position to the next expiry, you may need to pay the premium.
3. I haven’t tried it but my understanding is it may be auto squared off.
Dear sir,
As you say if it is 20% of the price then it will be
My short sell is HDIL 1000 shares at 82.25 ie 822500
and if the price as per T2 is 82.85 and 20% extra on it then it will be 16570 ie our penalty will be 16570 or will it be 82850+16570 kindly explain
I am worried about the penalty will it be so high as 16570
Kindly explain.
Thanks and regards
Sayeeda
Ask your broker for the exact amount but as far as I know it is 20%. Yes it will be penalty of 16k as far as I can sense it.
Hi Shabbir,
Kindly explain ” MARGINS “
Joseph, See http://shabbir.in/no-margin-trading/ and if you need more do let me know in comments and I will be more than happy to clarify.
Dear sir,
I understood about short selling which you have explained clearly. But my problem is of intraday wherein I have made a mistake of taking delivery of scrib which I do not possess ie I have taken sell delivery instead of buy delivery. Since the market for the past 2 days is in uptrend what shall I do and what is the remedy for it.
Please reply as tommorrow is T2.
Thanks and regards
Sayeeda
You will be penalized 20% of the price for short of stock.
Thanks Shbbhirji, nicely explaind.
The pleasure is all mine Ashok
very clearly explained and in simple words with proper examples ,which actually enhanced my knowledge thkz
The pleasure is all mine Ruchi.
Hi Shabbir,
Thanks very much for the beautiful way you explained short selling
I tried other places before, but yours was very simple and easy to understand
Thanks again
J L L Vaz
The pleasure is all mine Joseph
Thank u… Very nicly explained… Will help iin my studies…………
The pleasure is all mine Harsh