Short selling involves selling a stock which you don’t own and then buying it back later in order to square your position.
Short selling can help you make money in intraday trades when you expect that the price of a particular security will fall during the course of the day.
How you can make profits from short selling in intraday trades is better explained with the following example:
Company X has just declared extremely weak quarterly sales figure. You are of the view that this will prompt a fall in the price of the stock during the course of the day. You want to profit from the situation. How do you do so?
Let us assume that Company X is currently quoting at Rs 100 per share. You expect the price to come down to Rs 95 by the end of the day. You therefore sell (short sell) 1000 shares at the current market price of Rs. 100. This is done by placing a simple “intraday sell” order.
During the course of the day, when the price comes down to Rs. 95, you square off your position by placing an intraday buy order for 1000 quantity. You walk away with a cool Rs. 5000 (5 x 1000) in your pocket from the transaction. This is because you’ve bought at a lower price (Rs 95) and sold at a higher price (Rs. 100).
The concept behind selling short
Are you are wondering how is it possible to sell something which you don’t own? The answer is quite simple. You borrow now to sell and the buy back later to repay. This concept is fundamental to short selling.
What happens if you do not square off your position manually?
In case you do not square off your position manually, your intraday trades will be automatically squared off at the prevailing market price before the market closes for the day. In India automatic square off is generally initiated on/after 3pm.