What is Shorting a Stock?

Buy, Hold and wait for the market to go up to book the profit is the normal psychology of any trader or investor but some traders are making profits even when the market is down.

Sounds interesting right? Here comes the concept of Shorting a Stock which is also known as Short selling.

Now you might be wondering ki ye short-selling hota kya hai and how can we make money out of it.

Let's get into our topic and understand what is Shorting a Stock mean?

Short selling is the opposite of the normal transaction (Buy first and Sell later) so the opposite will be Sell first and Buy later.

In a normal transaction, the view is bullish which means you will earn profit If the market goes up but in short selling, the view is bearish which means you will earn profit If the market falls.

How to short a stock?

Let's understand with an example, the stock ABC is trading @ Rs 100 and you believe that the stock price will fall and it can fall to Rs 95 so you need to select ABC stock and the product type should be intraday because in stocks shorting can be done only on an intraday basis.

I know you might be thinking ki can I short in delivery? I'll explain this later in the same blog.

So you selected the product type as intraday and you simply sold the shares @ Rs 100 and after some time the stock started performing in your favour that is the price is falling and it went to Rs 90 which is beyond your expectation so you simply purchased the stock back @ Rs 90 so the difference is Rs 10 and that is your profit.

When you short a stock you're creating an open position, so to close this you need to buy back the stock the same day.

How to short a stock in delivery?

As I mentioned In stocks, shorting can be done only on an intraday basis but you can short in delivery product type as well the only thing is you should have the holdings of that particular stock that you want to short.

Let's understand with an example, say you want to short XYZ stock in delivery product type so to execute this transaction the broker will check your holdings whether you have the particular stock in your demat account or not.

If you have the XYZ stock in your demat account then your broker will allow you to place the order, otherwise, the order will get rejected for the reason of "insufficient holdings or not allowed"

So the answer is Yes, If you have the particular stock in your demat account then you can short the stock on delivery product type.

If not then you need to select intraday as the product type.

Can you lose money in shorting?

The simple answer is Yes, you can lose money in shorting If the stock price moves up.

Let's understand with an example, say you have shorted a stock @ Rs 100 and the price started rising and before the market close the stock price went to Rs 110 so to close the open position you need to buy back the stock, so now you have to purchase the stock @ Rs 110 which is Rs 10 higher than your shorting price so that Rs 10 is your loss.

You should do thorough research and analysis before shorting any stock and always use a stop loss to limit your loss.

See y'all in the next blog, Cheers!