Generally, we buy stock and when the share price rises up then we sell the stock, in this way we make profit. this means buy the stock at a lower price and sell at a higher price then you can make a profit. but in short selling, this process is opposite means first sell then buy the stock. you can make profit when you sell at a higher price and buy at a lower price.
When traders think that the share price will fall then they do short selling. if the trader fast sell the stock then share price fall, and if the trader buy the stock then the trader will make a profit.
For Example, A companies share price is currently trading at $100. One trader sell the stock at $100 and when the share price is falling to $95. And trader buy the stock. So that trader will get $5 profit. This is short selling.
How Short selling works
Short sell means you are selling stock without having stock.
when you are selling the stock for a day so you have to buy the stock that day before closing the market. This means you have to buy it before 3:30 PM.
If you forget to buy the stock on that day so in this case, you have to pay a penalty to the stock exchange.
Basically stock exchanges work on the T+2 process. Means, the stock exchanges, will takeT+2 days to exchange your share from your Demat account to the buyer Demat account. Means if you sell the stock Monday then Tuesday exchange will check your account and Wednesday your account share will transfer to buyer Account.
If you sell the stock but you didn’t buy before closing the market. In that case, stock exchanges will check the transaction the next day. If you don’t have share on your Demat account then exchanges will buy shares from the auction market and buying share will give to buyer who brought stock from you.
But if you sold stock at $100 and the auction price is $110. So you have to pay $10 rupees extra + Penalty.
This is why if you do short sell then you should buy the stock before 3:30 or you have to pay high share price and exchanges will penalize you.
What Is Short Delivery
As I discuss above the article when traders short sell the stock and for any reason, the trader didn’t but the stock. this is the short delivery.
in this situation the next day when the stock exchanges will check trader’s Demat account if there is not share on the trader’s dreamt account then exchanges will buy same quality stock (your short sell quantity) from the auction market and give those shares to the buyer ( who brought share from you while short selling).
If you short sell at $100 and the auction buying price is $110. so you have to pay an extra $10 + Penalty. so that why don’t take short delivery.
long term short selling
the best way of short selling is short sell the future stock. You can short sell the future contract of the stock. but not all the stock has the future. and the futures contract is for 3month. so if you think to short sell for a long term then short sell the futures contract. the future contract period is maximum for 3month. so after 3month, you have to roll over the contract but as you roll over your expenses will be rise.
Conclusion
Short selling is the Tool in the trading software. using this tool traders can sell stock without having the stock in there Demat account because stock exchanges take 2 days to transfer share from seller account to buyer account. so if you sell the stock in the market hour and before closing the market buy. and after 1ḍay later when the exchanges will check your Demat account they will find you have share available and then exchanges transfer your share to the buyer account.
And if you did not buy the stock then exchanges will buy the stock from auction market and transfer to the buyer account. but you have to pay auction market share price and penalties.
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