What is Short-Sell? - Part I


Today’s blog focuses on how to carry out short-sell trade in the share market. In the entire world, wherever there is a boom in the markets, it’s easy for businesses to make money there. But, is there any such business in the world wherein you can make money even during the recession? Yes, you can do so by trading in the stock market in shares, commodities, and currency, etc.


The fact is that most of the people who enter the share market are quite afraid of the recession in the share market. But there is this one such person who has accumulated most of his wealth during the period of recession. So, who is this person & how did he manage to create wealth during the recession? Let us see.


In the year 1987, the American share market witnessed a huge crash of about 22% in just a single day. There was this one person who had rightly predicted this crash and made a lot of money in just a single day. His name is Paul Tudor Jones. Similarly, when in the year 1990, the Japanese share market valuation had reached its peak i.e. it was very expensive, even there who accurately predicted this over-valued market bubble and made enormous wealth, he is again none other than Paul Tudor Jones.


So, how did Paul Tudor Jones made a large amount of wealth, how to make money during the recession, how to carry-out short sell, etc. All this is possible using the method of short-sell.


Let’s take a simple example:

Consider I am the seller of mangoes. Yesterday the box of mangoes cost Rs. 125, today it has fallen down to Rs. 100. So you think the price has decreased, so you are getting the box at a cheaper rate. Now you come to me and ask for the box of mangoes and I agree to sell even when in reality I don’t have the box with me currently. I am a businessman and so I knew that the price of the mangoes will fall further from Rs. 100 to Rs. 75.


I lied to you saying that I have the box of mangoes with me and promise to give you the box in an hour. So you paid me Rs. 100 and left. Now I take your Rs. 100 and go to the market and wait for the rate to fall further. Thus, my prediction turns out to be right and the rate of the box of mangoes falls to Rs. 75 from Rs. 100.


So out of the Rs. 100 that you had given me, I took out Rs. 75 and bought the box of mangoes and gave it to you. Now I have the extra Rs. 25 with me, which means even when the prices were falling I still made a profit. Despite the recession, despite the rates falling; I still made money. This is known as Short-Sell.


Hence, if I can make money by carrying-out a short-sell trade with a box of mangoes, similarly, I can also do this kind of short-sell trade in the share market and earn good profit there too.


Let us understand this with the help of a single example:

Consider a company named XYZ Pvt Ltd., whose share price is Rs. 100 per share currently. Now, this share price was Rs. 125 per share yesterday, which has now fallen to Rs. 100 today. Here the trend is bearish in nature. So, you can predict this accurately and carry-out a short sell here, which means you are selling the share without actually having it with you in reality. Is it possible to sell when actually you don’t own it? Yes, that is the reason it is called short-sell. 


So, you said you had a share who wants to buy it? Now, a person comes and offers to buy that share for Rs. 100 and you accept the offer. The person pays you Rs. 100 and leaves. Now, you wait for the share price to fall further and as per your prediction, the price of the share falls to Rs. 75 per share.


The buyer had given you Rs. 100, so out of that Rs. 100 you take out Rs. 75; get that share and give it to the buyer. Out of the Rs. 100, you saved Rs. 25 which is your profit. Even though the rate was falling, you still managed to make a profit. This is known as Short-sell.


In this way, short-sell means selling a share even when you don’t own it actually and then buying it at a much lower price to earn a profit out of this deal. So, how and where to carry-out this short-sell in the share market? More details on this in our next part of the short-sell blog.


Till then stay tuned...


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