What is short selling?
When an investor sells the shares which are not owned by him during the trade is referred to as short selling. Short selling is done with the sole purpose of earning profit. In this, the shares are borrowed by the traders from the owners with the brokers help to sell them in the market in the hope that the share prices will drop. And when the price falls the short-sellers buy those shares and earns a profit. The process of short selling is more risky than rewarding. It is mostly done by investors and traders on the basis of prediction that the share price will go down before they are given back to their owner.
It is practised in the stock market to earn profit in a small period. Some people invest in the stocks hoping to get profit in future when the stock’s price rises. Unlike these people, the short sellers to earn profit from the price drop.
How does short-selling profit in share market?
The investor borrows the stock for short selling on the basis of the predictions about the price drop of any particular stock or it must happen when there is a bearish trend and the stock price are expected to fall. And for borrowing the stock one must have a margin account.
The broker will lend you the stocks only on the condition to return the stocks to him during the settlement time. And as expected, if the price of stocks you borrowed goes down, you can buy those stocks at a low price and give it back to the lender and get the profit. Which is the difference between the selling price and buying price.
Advantages of short selling:
- One of the advantages is that you earn profit even when the stock prices fall.
- It is used as a hedge.
- It helps in boosting the liquidity of specific stocks and provides the traders with a chance to earn.
Disadvantages of short selling:
- It can be banned by the government is short selling can bring an unusual downfall in the stock prices.
- Short selling causes a major loss to the traders if the stock prices rise.
- As it is against the general trend so it is not possible to hold a position for a long time.