SHORT SELLING
1.Context
Short seller Hindenburg Research on January 25 disclosed short positions in Adani Group, alleging stock manipulation and accounting fraud in its latest investigative report.
2.What is Short selling
- “Buy low, sell high” is the traditional investment strategy in which one buys a stock or security at a particular price and then sells it when the price is higher, thereby booking a profit
- This is referred to as a “long position”, and is based on the view that the price of the stock or security will appreciate with time
- Short selling, or shorting, on the other hand, is a trading strategy based on the expectation that the price of the security will fall.
- While fundamentally it is based on the “buy low, sell high” approach, the sequence of transactions is reversed in short selling to sell high first and buy low later. Also, in short selling, the trader usually does not own the securities he sells, but merely borrows them
- In the stock market, traders usually short stocks by selling shares they have borrowed from others through brokerages.
- When the price of the shares falls to the expected levels, the trader would purchase the shares at the lower price and return them to the owner, booking a profit in the process
- If, however, the price of the shares appreciates instead of falling, the trader will be forced to buy shares at a higher price to return to the owner, thereby booking a loss
| In short selling, a position is opened by borrowing shares of a stock or other asset that the investor believes will decrease in value. The investor then sells these borrowed shares to buyers willing to pay the market price. Before the borrowed shares must be returned, the trader is betting that the price will continue to decline and they can purchase the shares at a lower cost. The risk of loss on a short sale is theoretically unlimited since the price of any asset can climb to infinity. |
3.Pros and Cons
| Pros | Cons |
| Possibility of Profits | Potentially unlimited losses |
| Little initial capital required | Margin account necessary |
| Leveraged investments possible | Margin interest incurred |
| Hedge against other holdings | Short squeezes |
Source:indianexpress, investopedia
