De-Jargoned | Short Selling2 min read . Updated: 23 May 2011, 10:26 PM IST
De-Jargoned | Short Selling
De-Jargoned | Short Selling
What is it?
Trading in shares need not always mean buying first and selling later; the reverse is also possible. Through short selling you sell shares first and buy them back later. For those interested in taking advantage of short-term movements in the share market, short selling provides an avenue. It can be done for securities that are a part of the futures and options (F&O) segment of the capital market.
Why would you do it?
Short selling is done when you believe that the price of a stock is going to fall rather than move up. Thus, by selling the stock beforehand, you hope to buy it back later at a lower price. Your gain or loss arises from the difference in the sale and buy prices.
How can you do it?
To make a short sale, you essentially have to borrow the share you intend to sell. The Securities Lending and Borrowing scheme, launched by the Securities and Exchange Board of India, or Sebi, enables the lending and borrowing of idle securities by investors through the clearing corporation/clearing house of stock exchanges.
For you, this is done via your broker and for the actual transaction you simply have to give a “sell" order first and a “buy" order later. In the cash market, short selling can be done only on an intra-day basis. This means if you sell a share in the cash market you will have to buy it back the same day.
In the F&O segment, however, you can sell and hold the position for a longer period. Contracts are available for one month, two months and three months. Each contract will be of a specific lot size, which means it represents a fixed number of shares. To start a transaction, you sell a futures contract of a particular share. The cost you incur is the brokerage, transaction cost and margin money against the transaction. The transaction cost and margin money requirements are a proportion of the contract size to be maintained till the transaction closes. At the end of the tenor, you can close the contract. This means buying back the contract. Any gain from the transaction will be credited to your account and any loss will be debited from your account.
To aid the transaction in the cash or the F&O segment you have to open a margin account with your broker. You maintain the required balance for your margin money in this account.
Since the transactions are completed in less than a year, short-term capital gains tax at 15% is applicable. If the gain is assessed as business income, it is taxed at 30%. Additionally, you also have to bear securities transaction tax (STT) of 0.017% of the actual traded price when a futures contract is sold; if it is an intra-day cash market transaction, 0.025% of the turnover is charged as STT at the time of sale.