Aryaamoney Blog

June 19

What is Short selling ?

Posted by: Bhuushan Godbole

Whts is Short Selling

Short Selling Explained

Short selling (also known as “Shorting” or “going short”) in the context of the stock market, is the practice where an investor sells shares that he does not own at the time of selling them. He sells them in the hope that the price of those shares will decline, and he will profit by buying back those shares at a lower price.

The difference between the price at which the share was sold short and the price at which it was brought back/purchased represents the short seller’s profit (or loss, if the stock price goes up). In other words, Difference between Sell price and buy price is Short seller’s profit.

Short sellers help the markets to function smoothly by providing liquidity and also serve as a controlling influence on investors’ over-excitement. Short selling acts as a reality check that prevents stocks from being excessively overpriced during such times.

Who does Short Selling?

Hedge Funds are one of the most active entities involved in shorting activity. Most hedge funds try to hedge market risk by selling short stocks or sectors that they consider overvalued.
F&O Traders taking high risks of margin Trades by Short Selling.
Day Traders & Speculators are another key segments of the short side trading.

Risks and Rewards

Short selling involves a number of risks, including the following:

Infinite risk-limited reward- A Short sale carries the theoretical risk of infinite loss if the Stock price goes up, while the maximum gain is the price drop below Sell Price.
Limitation- Short Selling position in Cash market has to get Square off during the day and for F&O short position attract a lot of Risks.
Timing is everything. The timing of the short sale is critical, since initiating a short sale at the wrong time can be a disaster.
The strict trading discipline required. Short selling is only suitable for traders who have the trading discipline required to cut their losses when required. Short selling requires constant position monitoring and adherence to money management and strict stop loss while Trading.

Conclusion:

Short selling is a relatively advanced strategy best suited for professional traders who are familiar with the risks of shorting and the regulations involved. In a downtrend, the common investor can use ‘Put Option’ to profit from Short selling with strict stop loss.

Short selling can be a great way of making huge profits if traded smartly during declining Downtrend Bearish market. ‘The Greatest ever tread’ in history was Short Selling trade during 2008 bearish market by John Paulson who has earned 4 Billion Dollars by short selling during heavily downtrend market.

Example of Short Selling:

a) In anticipation of a downtrend, person ‘A’ Short sells a Stock at price 500, expecting it to go to a level of price 480. The stock then drops to the level of 480 as expected. Person ‘A’ makes a profit of Rs.20 (500-480=20) in short selling.

b) In anticipation of a downtrend, person ‘B’ Short sells a Stock at price 500, expecting it to go to a level of price 480. Against the expectations Stock price rises above to Level 510. To avoid further losses Person ‘B’ books loss of Rs.10 (500-510=-10) in short selling.

August 14

AryaaMoney ISO 9001:2008

Posted by: Bhuushan Godbole

6th August 2014 - Aryaa Money is now ISO 9001:2008 Certified
Aryaa Money is Kolhapur based trading & training institute engaged in Stock, Commodity, Forex market trading, training and consultancy services
www.aryaamoney.com

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