Unlike buy-on-dip-sell-on-rise, which is easy to understand, short selling is a stock trading strategy that is a bit difficult to understand since we encounter it less frequently in our daily lives. It consists of investors betting that the price of a stock will decrease. The question now is, how does make profits from it.
Baisc principle of short-selling
The basic principle involves borrowing shares of a company and selling them – yes, the borrowed shares – at the current higher price and then, buying them later when the price dips. The amount of profit depends on the difference between the selling price of the borrowed shares and the buying price of the same number of shares at a later stage.
After the shares are purchased at a lower price, the short-selling firm that had borrowed the shares returns them to the firm from which they were borrowed. This completes the four-stage process of short selling. The shares are borrowed from a stock broking firm in the first place.
Accurate speculation is the key
It is clear from the concept that, in order to make a profit, a short seller has to speculate correctly on when the stocks of a company would decline. However, there are instances when investors can short sell to protect gains (or reduce losses). If they own a stock and do not need to borrow them in the first place, they can short sell the shares to limit losses.
Short selling is risky since if the stock price increases instead of decreasing, the short seller has to buy them at elevated prices, which can lead to big losses.
SEBI alleges Hindenburg had a motive
Hindenburg Research, a US-based short-selling firm, profits from such drop in prices since it often has a hand in engineering the drop in prices. Its reports on the Adani group’s alleged misdeeds led to a sharp drop in the prices of Adani group shares between the last week of January 2023 and March of the same year.
Part paid, part due
Bloomberg has reported that Hindenburg Research pocketed $4.1 million from short selling Adani stocks. According to Sebi, Kingdon Capital Management, a New-York based hedge fund, was given access to the report on Adani group a full two months before it was published and it made a huge profit from the short sale and gave Hindenburg 30% of the booty. Apparently, the hedge fund still has to pay another $1.4 million to Hindenburg.
Short selling has suddenly hit the headlines since January 2023 when US-based short seller firm Hindenburg Research made serious allegations of misdeeds against the Adani group. Markets Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
