What Is Short Selling -| How To Earn Profit From A Falling Market|

 What is short selling? How to earn from a falling market? Is there a way to earn from falling market.

Yes, the answer is big yes. You can make profit down trend. The strategy which we are talking about is short selling. It is a much easier concept that anyone can use after knowing how it works.


Topic 

  • What is short selling
  • Introduction
  • How to earn from a falling market
  • Is it wiser to use short selling

What is Short Selling.

What Is Short Selling - How To Earn Profit  From A Falling Market

Short Selling is when you sell before buying to make profit. Sound unrealistic but it is a technique that many use.

When you short sell you are borrowing shares from brokers and waiting the price to fall to make profit and for squaring off the trade you just buy back those shares at low price.

Many avoid short selling at first because the profit making is limited and the loss is unlimited.

But after complete analysis it is a fair practice. It gives a great opportunity to those who act in situation where everyone is worried. In the COVID-19 situation, when the market is falling it showed a great profit making opportunity any many seized this opportunity and there will always be this kinds of opportunities in the future as well.

You need no certified crash course to do this perfectly, you only need is the knowledge how to trade what are entry and exit trade some indicators and practical experience or knowledge to execute it. That's it all you need for short selling.  

For example- An investor believes that Stock A, which is trading at $100 per share, will decline when the company announces its annual earnings in one week. Therefore, the investor borrows 100 shares from a broker while short selling those shares to the market. So now the investor “shorts” 100 shares of Stock A which he did not own with hopes that the share price will decline.


A week later, Stock A’s price falls to $90 per share after the company announces annual earnings. The investor decides to close the short position, so he buys back 100 shares of Stock A from the open market at a price of $90 per share and returns those shares to the broker; this is a buy-to-cover order. Therefore, the investor makes a profit of $10 per share which is a total of $1,000 for the whole transaction not including commissions and interest.

What Is Short Selling - How To Earn Profit  From A Falling Market

This is the basis fundamental of short selling that you need to know.


Introduction

What Is Short Selling - How To Earn Profit  From A Falling Market

Negative effects of short selling.

‌The term "short" was in use from at least the mid-nineteenth century. It is commonly understood that "short" is used because the short-seller is in a deficit position with his brokerage house. Jacob Little was known as The Great Bear of Wall Street who began shorting stocks in the United States in 1822

‌Short sellers were blamed for the Wall Street crash of 1929. Regulations governing short selling were implemented in the United States in 1929 and in 1940. Political fallout from the 1929 crash led Congress to enact a law banning short sellers from selling shares during a downtick; this was known as the uptick rule, and this was in effect until 3 July 2007 when it was removed by the Securities and Exchange Commission.

‌During the 2008 financial crisis, critics argued that investors taking large short positions in struggling financial firms like Lehman Brothers, HBOS and Morgan Stanley created instability in the stock market and placed additional downward pressure on prices.

Short selling was banned in India in March 2001

In India, as stocks saw sharp falls in the wake of the Covid-19 outbreak, SEBI slapped a ban on short selling in an attempt to stabilise the market and maintain investor confidence.


Recognition to Short Selling.

 In 2005, SEBI recommended that institutional investors such as mutual funds be allowed to short-sell shares in the market, as well. SEBI issued short-selling guidelines for institutional investors in July 2007. 

Short selling already legally recognised in the year 1937.

The SEC adopted Rule 10a-1 in 1937, which stated market participants could legally sell short shares of stock only if it occurred on a price uptick from the previous sale.


How To Make Profit From Falling Market.

What Is Short Selling - How To Earn Profit  From A Falling Market


To make profit from falling market you have enough options and futures as well as equities. 


Options-  If you believe the stock price will fall to 90, you can take positions in options. Options gives you a margin of safety to play. There are basically 2 types of options: Call option and Put option. If you believe price will fall, you can buy a put option or short a call option. Vice versa, if you expect price to rise, you will buy a call or short a put option. When you buy an option, you pay an amount to the counter party who sold you the option. This amount is called as the options premium. You need to pay this premium for the risk the other party is bearing.

 This is similar to buying an insurance policy. The insurance company is selling you an option of getting the sum assured in case of any untowardly incident. If you are lucky and there is no casualty, the insurance company benefits by pocketing the premium you paid them.

Futures- When you are expecting the price of a security to fall, all you need to do in futures is take a Short position.

For example.
If the price of a stock will fall from 100 to 90, you take a short position in the stock without actually holding the stock. When the target price of 90 is achieved, you simply buy that stock back. In Futures terminology, we have something called as a lot. 

 The size of a lot in Indian market is 5lacs. What this means is if the price of the stock is quoting at Rs. 100, you will short approximately 5000 shares. When the price falls by 10 rupees, you make 10 x 5000 = 50,000 rupees. This concept of buying/selling more than the money you have is called as leverage.

Equity- If you directly wants to trade in equities you need to go short on those stock which, you believe will decline in price but you must have margins so that the the broker take as collateral in case if the price rises. Margin acts as collateral in the share market. 

For example- If you believe shares assume Adani enterprises will fall after the bidding of coal mining goes against the Adani group and it will impact the whole business you will sell or short these shares and in the near time it falls below it's average, you will just buy back those share to square off.

The difference between buying and selling is you profit.

Is It Wiser To Short Sell.

What Is Short Selling - How To Earn Profit  From A Falling Market


There are two factors in the share market bull and bear. These factors shows the market is dominating or being dominated. And people can follow either one of those. There are big bulls as well as big bear.

And after coming all the way to this point you have now know shorting is not illegal anyone since a long time and you can go according to your liking.
 
But before you choose any of method to trade or invest you must ask yourself a question. DO YOU REALLY KNOW ENOUGH HOW IT WORKS? DO YOU HAVE ENOUGH EXPERIENCE OF INVESTING AND TRADING?

And if your answer is yes then you can go on short selling. But always remember there are always risk in the stock market. Always manage to take low risk or to have good profit-to-risk ratio.

Have a good risk management.. 
Don't know what is risk management tune in for this in next post. 

NOTE- our purpose of any examples and content is not to provide tips and tricks, they just represented as examples.

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