Re: Investor Education

What is short selling?

Most of us are taken back with the stock market crash of late eroding
our investment value, but you would be surprised to know that you can
make profits even in a crashing market. Want to know how is that
possible at all? To know how to make money in a bear market, we need
to understand the concept of short selling.

What is short selling?

Short selling is selling of a stock which is not owned by a seller.
When a trader feels that the stock price of a particular company will
fall in the near future, he indulges in short selling. Let us see how
it works with a simple example.

Eg. Suppose say, trader Ram feels that stock price of company XYZ
currently trading at 1000 rs will go down significantly in the near
future due to market correction or any other reason. Ram borrows
certain number of stocks,say 20, of company XYZ from his broker for
1000 rs/share.The commitment is that he will have to return back 20
shares to the broker on a specified date in the future say in one
month's time.

After purchasing the stock at 1000 rs, Ram immediately sells the stock
at 1000 rs and gets 20,000. As expected the stock price of the company
XYZ falls by say 100 rs and is at 900 rs at the end of one month. So
Ram buys back 20 shares of XYZ at 900/share thereby spending 18,000
and gives back the shares to the broker.

Hence Ram has gained 2,000 from short selling of company XYZ.

Risk Involved

Making money is not that easy. So once you buy the stocks assuming
that it's price will go down, what if the price begins to rise due to
the overall market sentiment and in these days, where the market
volatility is very high the markets can go up and down in a days time
and hence there is significant risk involved in short selling.

So should we not indulge in short selling at all? If involved how to
trim our losses? The answer is short covering. Let us digg on that in
the upcoming posts.

Subbu
http://investorskool.blogspot.com/
.

Relevant Pages

  • SEC: Ban All Short Selling
    ... SEC: Ban All Short Selling ... We suffer a loss of Market Integrity; The US is now a Banana ... whether bears illegally drove down stock prices of financial firms. ... curbs on the practice that went into effect Thursday morning. ...
    (misc.invest.stocks)
  • Re: As Stock Market Rallies, Insiders Sell: TrimTabs
    ... Of course insiders were selling. ... Also in a rising market folks should always be selling. ... Most insiders have lost their shirts. ... As Stock Market Rallies, Insiders Sell: ...
    (misc.invest.stocks)
  • Re: Halt short selling for a while.. Opinions?
    ... I think short selling should be banned for a while. ... still available to the unscrupulous hedge fund managers and as much as I ... We need market confidence to get money flowing back into it. ... companies stock to drive down its stock seems reason enough to stay out ...
    (misc.invest.stocks)
  • Re: Financial crisis
    ... the stronger the market forces that will drive it back to that pont. ... object to short selling in a rising market where an investor loses money ... or even by its share price hitting zero. ... For every short seller there is a stock lender and a purchaser of the ...
    (uk.media.radio.archers)
  • Is market manipulation taking place that has been supporting the stock market while causing gasoline
    ... has been supporting the stock market while causing gasoline prices to ... my 2 cents to the question of stock market manipulation via Treasury ...
    (soc.culture.cuba)