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What is SHORT SELLING

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SEBI permitted short selling in Indian Stock Exchange in year 2007 and issued guidelines for short selling in securities. Short Selling means sell of securities that the seller does not own at the time of selling. It is temporary transfer of securities from one person (lender) to another (borrower) via an approved intermediary. In short, the borrower is obliged to return them either on demand or at the end of agreed term. 

Short selling can be done by borrowing the stock through Clearing Corporation/Clearing House of a stock exchange which is registered as Approved Intermediaries (AIs). Short selling can be done by retail as well as institutional investors. The Securities Lending and Borrowing mechanism allows short sellers to borrow securities for making delivery. 

When shorting, you sell equity share when you believe the price of equity share is too high. Believing the equity share price is too high, you want to take the advantage of this situation and earn money while that market push the stock down to its fair value. In other words, you believe that the stock is overvalued and you want to make money from particular equity shares. So borrow equity shares when it is at high and sell at same time and buy at lower rate when market comes down and return the equity shares to lender. 

Example: In March 2015, Manish thinks Hindustan Unilever Ltd. is overvalued. He sells short 100 shares of HLL at Rs.250 per share. The stock market crashes in April and HLL‟s share price falls to Rs.210 per share. Manish buys back 100 shares of HLL and closes out the short sale. Manish gains the difference between the sales proceeds and the purchase costs and pockets Rs.4,000 from the short sale, excluding transaction costs. 

Securities lending and borrowing describes the market practice whereby securities are temporarily transferred by one party (lender) to another (borrower) via approved intermediary. The borrowers are obliged to return borrowed securities to the lender on demand and on agreed terms.

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