Short selling

What is short selling?

One way to make money on stocks for which the price is falling is called short selling (or going short). Short selling is a fairly simple concept—a , trader or investor sells the stock first and then buys the stock back.

This is possible only in Intraday Trading in equity segment


Short sellers are betting that the stock they sell will drop in price. If the stock does drop after selling, the short seller buys it back at a lower price and The difference between the sell price and the buy price is the profit.


KEY TAKEAWAYS


Short sellers are betting that a stock will drop in price.
Short selling is riskier than going long on a stock because, theoretically, there is no limit to the amount you could lose.
Speculators short sell to capitalize on a decline while hedgers go short to protect gains or minimize losses.
Short selling, when it is successful, can net the investor a nice profit in the short term as stocks tend to lose value faster than they appreciate.


Example of a Short Sale


For example, if an investor thinks that Tesla (TSLA) stock is overvalued at $625  per share, and is going to drop in price, the investor may "borrow" 10 shares of TSLA from their broker, who then sells it for the current market price of $625. If the stock goes down to $500, the investor could buy the 10 shares back at this price, return the shares to their broker, and net a profit of $1,250 ($6,250 - $5,000). However, if the TSLA price rises to $700, the investor would lose $750 ($6,250 - $7,000).


What Are the Risks?
Short selling involves amplified risk. When an investor buys a stock (or goes long), they stand to lose only the money that they have invested. Thus, if the investor bought one TSLA share at $625, the maximum they could lose is $625 because the stock cannot drop to less than $0. In other words, the maximum value that any stock can fall to is $0.

However, when an investor short sells, they can theoretically lose an infinite amount of money because a stock's price can keep rising forever. As in the example above, if an investor had a short position in TSLA (or short sold it), and the price rose to $2,000 before the investor exited, the investor would lose $1,325 per share.

 If an investor shorts a stock, there is technically no limit to the amount that they could lose because the stock can continue to go up in value indefinitely. In some cases, investors could even end up owing their brokerage money.