SELLING SHORT

SELLING SHORT
• Bearish markets and falling stock prices don’t always mean losses. You can also profit from falling prices if you use the right strategy and are able to take quick decisions.

• The most common bear market strategy is short selling—or selling shares you do not own in the expectation that the price will fall. When the price falls, you buy back the shares at a lower price.

• Buying back shares to square a position is called short covering. The difference in the price is your profit. Of course, this is a risky gambit and can result in a loss if the price rises after you sell.

• Till April this year, it was necessary to cover short selling during a trading session. You had to compulsorily submit shares you sold by the end of the day. Failure to do so attracted a penalty.

• But the introduction of the Stocks Lending and Borrowing Scheme allows short sellers to borrow shares from brokers and carry forward the transaction for up to one week.

HOW SELLING SHORT WORKS
Suppose you short sell 500 shares of a company at a price of Rs 100 each. You are expecting the price to fall to Rs 85. The table on the right shows your profit (and loss) if the share price falls (or rises). The calculation does not take into account the commission payable to the stock broker on each transaction.

500 shares short sold at Rs 100	Scenario I: The share price falls	Scenario II: The share price rises
Stock price	85	110
Difference from your selling price	-15	+10
What you pay to buy back shares	42,500	55,000
Your profit (or loss)	7,500	-5,000
All figures in Rs

KEEP IN MIND
• If you are unable to square short selling, the exchange buys shares in an auction and gives them to the buyer. That can lead to losses if share price is higher.

• Discipline is important. Buy back shares when the target price is reached. Similarly, set a strict target to cut your losses and buy back if the price starts rising.

• Don’t wait till the fag end of the session to buy back. Short covering can push up the price of a share as short sellers scramble to buy back.

• Too much short selling can cause a share to be oversold. that is actually a bullish signal as short covering may cause the price of the share to go up.