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What is short selling: How to short a stock in India

Investors in India can profit from falling prices by shorting stocks, however there are many risks.

Short selling historically gets a bad rap in the investment world because traders are benefiting from a company’s loss. And if enough traders or fund managers short a stock, it sends a message to the market which can result in more selling hence sending prices lower.

However, not everybody believes short selling is bad. One argument is that it keeps the market running efficiently because short-sellers dig out companies that are “overvalued”. The strategy can also be used to offset losses during a stock market crash. This can be particularly useful for Indian investors holding a portfolio of dividend shares that they’d prefer not to sell as prices fall.

While it varies from country to country, there are a few different ways to short sell stocks, from borrowing shares from a broker to trading put options and CFDs. We’ll give you an overview of what short selling means, how you can do it and the risks involved.

Important: Short selling is a controversial strategy and not everyone thinks it should be allowed. Some countries have banned it entirely. Either way you look at it, short selling is for experienced traders only.

What is short selling?

The idea behind this investment strategy is that if you think a stock’s value is going to decrease, you can make money out of it. You borrow the stock from a broker, sell it at the market price, buy it back when the price has decreased, then give the stock back to its legitimate owner and keep the profit.

A quick example: Say you think HDFC Bank’s stock price is going to fall today. You borrow 1 HDFCBANK share that costs INR 1000 and sell it at market price (INR 1000 x 1 = INR 1,000). It turns out that you’re right and by the end of the day, it’s worth INR 800. So you buy it back for less than you sold it (INR 800 x 1 = INR 800), then give it back to the broker. You keep the profit, which is INR 1,000 – INR 800 = INR 200. Even after the fee that you’ll have to pay to the broker for the stocks you borrowed, it’s a nice earning.

It sounds easy, but the problem is, things could also go the other way around. If it turns out that you were wrong, and at the end of the day 1 HDFCBANK share is worth INR 1200 instead, you’ll lose money (INR 1,200 – INR 1,0000 = -INR 200).

Traditional short selling

The traditional means of shorting a stock directly is to contact a full-service broker or a major investment fund such as Morgan Stanley. Full-service brokers usually offer advice alongside trading and they charge a premium price for the service.

In India, short selling has had a tumultuous history. After having been banned for the better half of the 2000s, short selling was finally permitted for both retail and institutional investors in 2008 by SEBI. Just last year, SEBI banned short-selling again from March to July due to the unprecedented market volatility brought on by COVID-19.

Today, very few brokers offer short selling as a service, and even if they do, very few advertise their services openly. Below is the traditional method for shorting a stock in India:

  1. Find a broker that offers short selling. Not all brokers will facilitate short selling and not all stocks will be available for borrowing, so you may have to do some research.
  2. Open a position to sell it. It will be bought at the market price and held under a contractual lending arrangement.
  3. Keep an eye on the price. Getting distracted is a bad idea. You need to be able to react quickly if things go wrong.
  4. Buy the stock back when you think it’s the right moment. You’ll need to find a good risk/reward balance. When things are going well, it’s easy to become too greedy and wait too long to buy back.
  5. Give the stock back and keep the profit (or sustain the losses). If the price goes down and you buy back for less, you’ll have made money out of your short selling. If the price goes up, you’ll lose money instead. Don’t forget that the risk is all on you.

Short selling through CFD, options or futures trading platforms

Many traders prefer to short sell through online share trading platforms. In India, there are two key ways to do this:

  • Intra-day short selling (spot market). Spot market intraday short selling is the process of betting against a company without using any complex derivative products. All you have to do is pull up the interface you would use to buy shares typically, and instead “sell” that amount to the market. However, this method has one key restriction: you have to close your short position by the end of the day. If you don’t, your broker would do it for you automatically, even if it’s at a loss for you. With this in mind, keep a close eye on your short position and close it off before the trading session ends.
  • Futures trading. You can also short a stock using futures trading. One of the most popular ways to trade futures is via CFDs or options. If you want to bet against a stock, you can sell the futures of that company in the current month’s or next month’s contract. Once you are short in the transaction, do note that you will be required to submit a margin deposit if you maintain a short position overnight. Eventually, to close the position, you can buy the asset from the spot market, hopefully at a lower price.

Compare online brokers to short stocks

One of the most common ways to short stocks is via CFDs. To select a CFD broker, simply choose one of the brokers below that have indicated “yes” for CFDs.

Name Product Number of stocks CFDs Shares Available Markets Link
Axis Direct
All NSE/BSE listed stocks
No
Yes
IN
Go to site
More info
Get brokerage cashback of up to Rs 500 on trades done online through Axis Direct website, Swift Trade, or Mobile app. Grow your investment portfolio and maximise your gains with AxisDirect’s 3-in-1 demat, trading and savings account.
Saxo Bank
19,000+
Yes
Yes
AU, CN, CZ, DK, ES, FR, TW, HK, IT, HU, SA, NE, NO, PL, RU, SG, CH, UK, JP
Go to site
CFD service. Your capital is at risk.
More info
CFD Service. Your capital is at risk.
Trade 40,000+ financial instruments at market-leading prices with this powerful yet intuitive trading platform.
Zacks Trade
Access to global markets
No
Yes
US, AU, ES, FR, HK, IT, NO, RU, SG, CH, UK, JP, MX, DE, CA, AUT, BEL, NL, SE
Go to site
More info
CFD Service. Your capital is at risk.
Trade stocks, bonds, ETFs, options, and more on 90+ international exchanges. Offers customisable trading platforms with over 120 technical indicators for your charting needs.
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Risks of short selling a stock

Short selling is for expert investors and you shouldn’t do it unless you know what you’re doing.

The reason it’s considered so risky is that you could lose “infinite” money. When you buy a share and “go long”, the maximum you can lose is the amount you invested. When you “go short” instead, there are no theoretical limits to how much share prices could go up, and thus to how much you could lose.

It’s especially dangerous if a lot of people are short-selling shares from the same company and the price unexpectedly goes up. At that point, everyone will start buying back quickly, causing the stock to go up even more. It’s what’s called a “short squeeze” and it easily becomes a vicious cycle that turns out very expensive for short-sellers.

Finally, don’t forget that short selling isn’t free. Indian brokers will charge a fee for lending stocks, and there are fees for other short selling methods too. Be aware that these will partially lower your gains and increase your losses.

Protecting your portfolio

Say you hold a portfolio of stocks and you predict that a market crash is coming or a company’s stock is going to fall. To avoid losses to your portfolio, one option would be to sell the stocks of the companies that you hold before their prices drop – if you can get the timing right.

However, if you hold dividend stocks, you might prefer to keep them for the long run for the income. To avoid your portfolio falling in value (without selling the shares) you could short the stocks to the amount you think they will fall – and so offset your losses.

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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