Did you ever imagine that you could gain from a fall in stock prices? Impossible you think? Have you heard about short selling or shorting? If you haven’t, this article will tell you what you need to know about short selling and how you can gain from it.
What’s short selling? The concept of short selling nurtures the thought of gaining from fall in stock prices. In a bearish market where stock prices are falling, one can gain from short selling.
If an investor anticipates a decline in the prices of a certain stock, then s/he borrows securities from his/her broker for a temporary time period. S/he then sells these securities at the current market rate. When the stock prices decline, the investor then re-purchases the securities at a lower current market rate. In this deal, s/he still holds on to the securities and profits from the difference in market prices. S/he then returns the securities to the broker.
You may like to go through the following pointers before entering into a short sale:
The essential purpose behind a short sale is capital gains. Unlike traditional stock investment, dividends are not to be taken into account.
One has to carry the risk that stock prices may increase and thus lead to losses.
Other than a direct form of investment, one may also consider short selling as a tool for hedging risk of fall in stock prices.
There are limits set by regulatory authorities on the amount of stock that can be borrowed and other aspects of short sales.
Accurate forecasting of future prices is imperative to the main purpose of short selling.
Are the investors in short sale deals pessimists? Though accused of flourishing on negative information about a company, they provide early signals of trouble in the organization. Short sellers gather vital information about the company and may discover potential reasons for decline in company performance in the future. This enables the management to make corrective changes.
Are you familiar with the concept of short selling? Do you think that the Indian stock markets are ready for investments of these types? Do share your views with us and other readers.
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