Term of the day: What is short selling?1 min read . Updated: 03 Mar 2020, 10:36 PM IST
- Short selling is extremely risky because there is no upper limit on how high a stock can go
- You should avoid short selling unless you are an expert investor
Short selling is the selling of a stock that you don’t actually own. This is done when you expect its price to fall and want to profit from the fall. It is implemented by borrowing the shares from someone else through the Security Lending and Borrowing Scheme of the stock exchange. For example, say ABC Ltd is priced at ₹100 and you expect it to fall to ₹80. You borrow shares of ABC, and sell them at ₹100. When they touch ₹80, you buy them back and return them to the person you borrowed from, making a profit of ₹20. You will be charged an interest of ₹2 on the borrowed shares, bringing your profit down to ₹18.
Short selling is extremely risky because there is no upper limit on how high a stock can go, and in this case a rising stock is a loss-making proposition. You should avoid short selling unless you are an expert investor.