Short Selling

What is Short Selling?

Short selling is an investment strategy where an investor borrows shares of a company and sells them with the intention of buying them back later at a lower price. The goal is to profit from the decline in the stock’s price. If the stock price falls, the investor can buy the shares back at a cheaper rate, return them to the lender, and pocket the difference.

How Short Selling Works?

1. An investor borrows shares from a broker or lender.
2. They sell these borrowed shares in the open market at the current price.
3. If the stock price drops, the investor buys the shares back at a lower price.
4. The investor returns the shares to the lender and profits from the price difference.

However, if the stock price rises, the investor would have to buy back the shares at a higher price, leading to a loss.

How to Do Short Selling?

To short sell:

• Open a margin account.
• Request to borrow shares of the stock you want to short.
• Once the shares are borrowed, sell them on the market.
• Monitor the stock price, and if it drops, buy the shares back at the lower price.
• Return the shares to the lender.

SEBI on Short Selling

In India, SEBI regulates short selling. SEBI allows both retail and institutional investors to engage in short selling. However, certain restrictions and rules apply, such as mandatory reporting and ensuring the availability of borrowed shares. SEBI also oversees mechanisms like stock lending and borrowing to facilitate short selling.