Hey guys! Welcome again to our blog. today’s post covers what is short selling in the stock market and how they are done.
What is short selling? How short selling is done in zerodha or upstox
if you ask any person who is experienced or working in the stock market has to do, what the short-selling? he’ll say it’s so simple first sell when the price is high and the price falls then buy and you will be like first sell high then buy low.
I welcome you all to a new article on short selling. Actually, I have covered this topic in my basics of stock market learning series. So just in case if you have not yet checked it out, please go ahead and check out my entire series.
I received a lot of queries from people as to sir could you give us a little bit more examples on. I thought why not write a full article. Which details a little bit more about short selling and that’s why I’m going to start about short selling right away.
What is short selling?
So first let’s understand the very base concept of what is short selling? first, let’s understand a general transaction. How does a general transaction take place? first, you buy, why do you buy you feel that the prices will go up that is why you buy.
let us you buy a stock 100 rupees and you feel that the stock price is going to go up, that’s why you buy wait until it goes up. Assume it goes up to 120 right then you will sell it off, correct what is your profit 120. which is your selling price minus 100 (120-100=20profit).
Which is your cost price but, chronologically what happened first you bought at hundred then you sold at hundred and twenty this is normal buying?
When would you do such kind of a normal buying. you are bullish on the market. when you feel that is markets will go up. if you think in the future the market goes down. how can I earn money in falling markets?
I will repeat the sentence very important how can I earn money in falling markets. for example, XYZ stock is currently at 150 rupees and you feel that this stock will definitely come down to 120.
How short selling is done in zerodha or upstox
What can you do to a normal person? who doesn’t know short selling? He will wait and watch till the stock comes down to 120 and then he will enter at 120 but if you’re a smart investor.
What will you do you will sell first at 150 and when the price goes down at 120 you will buy it. So, what happened in this transaction in this transaction you sold something which you did not have.
Yes, you sold something which you did not have and when the prices went down from 150 to 120 then you bought it back.
MIS (Margin intraday settlement)
For such a transaction, you need to place an MIS (MARGIN INTRADAY SETTLEMENT) or intraday order. So always remember this whenever you are doing a short-selling place an MIS order.
What is MIS order? let us understand MIS is means margin intraday settlement. the word itself says it’s an intraday settlement. so what happens in an intraday settlement.
You’re going to buy and sell both on the same day. But again remember, what is the key feature of short-selling sell high and then it goes low then buy.
So step number one is selling. step number two buys. when it is going to be an intraday situation. it has to be done during the market only.
Square off timing
Everyone knows that the market is from 9:15 in the morning to 3:30 in the afternoon. Please be aware that these MIS transactions are squared off by various brokers at their own time slots.
like there’ll be many brokers who will Auto square it off at 3:10. so let’s take it this as an example of the previous case. which were taking that at 150 rupees you had sold a specific stock.
Unfortunately, it doesn’t come down but it was higher. it goes 160 are you at a loss now. Yes, how much lost 10 rupees per share.
Now you’re feeling like maybe in another 10-20 minutes. it will come down but the broker will not wait till then the broker will automatically square it off at 3:10 pm.
Zerodha square off timing
There are some brokers like Zerodha. who give you that additional 10 minutes. In Zerodha, the square of the transaction at 3:20 PM. so that additional 10 minutes of hope you can have that maybe the share price will come below 150 and you may make a certain profit.
I hope you have understood this as to what is MIS. but still, one question I’m sure remains in your mind that if I don’t have a share.
How am I able to sell it so let me try to answer this question in the most simplified manner. Assume that you are wanting to sell a share first because you feel that will go down. assume that you sell a hundred quantity of a specific stock.
Then generally many of the brokers would put a minus sign here because you were selling it. now so first it will be minus hundred whenever you are selling.
It assumes that you sold it at a price of 150 rupees. after one of the same stock is trading at 140 rupees. So what will happen when you buy it. when you sold it was minus quantity. now you didn’t have anything but when you buy it.
It will be one less hundred quantity and what is the net effect you sold a hundred and you bought a hundred. what is your net quantity at the end of the day?
Remember this I had told you MIS is very important for any short selling. This is to be done on the same day first it was minus hundred.
When you sold the quantity now the last hundred you bought it. so what happened at the end of the day you have to sell your shares to anyone do you have to buy it from anyone.
final is zero position what about this ten rupees this 10 rupees would nothing be but your profit. because you had sold it at 150 and you bought it back at 140.
So 10 rupees in fact is your profit but still, some people are scared how come someone can allow you to sell first. if you don’t have it answer is very simple for this our government allows it our regulatory body.
In India, everyone knows that SEBI is the authority. which is a regulator of the stock market. SEBI allows short selling in India in fact in 2011. There were some countries like France, Spain, Italy, and Belgium. who had banned short selling?
If a country bans short-selling then it will not be allowed. in fact, at that time there were great rumors in India that also may ban short-selling. so had our government banned. it could have been a bad answer is, yes.
How are we allowed to do short selling in India? right now because it is allowed by our regulator but what does our regulator say very important that you have to cover it on the same day. you have to do it as an intraday settlement.
You understood, how can I do it what is the answer. how is it, a lot simple our government allows it a regulator allows it. Why we are able to do it but what is the precondition it has to be done within the same day.
The last question remains in my mind. I’m thinking of two questions that remain in my mind number one when I buy the share at the end of the day so either as an automatic square off or either I place a buy order myself there are some viewers of mine.
who had asked this question to me? when I buy that share again. will I get the delivery of those shares? how will you get a delivery? I mentioned it’s minus a hundred first and then plus hundred. So what is your net position that position is zero?
if your net position would have been plus something then you would have gotten the delivery of the shares. I hope this is clear for example if you sell 100 shares and you buy 120 shares.
what is your net position, the net position is plus 20 then for that additional 20. you may get the delivery of the shares. if you have a CNC order. CNC is cash an carry or delivery order.
one last point, if you sold at 150 stock hits an upper circuit. I hope you know what is the upper circuit. The upper circuit is a scenario where the stock moves up to five percent. So assume that the stock opened at 150 you sold at 150
The stock goes to 180 and it gets locked at 180. what happens at an upper circuit, there are all buyers but no sellers so I hope this point is clear. a little bit quickly one more time.
You’re sold at 150. what happened the share price went up to 180. the share is locked at an upper circuit. In this scenario all buyers but no sellers. you are one of the buyers who is desperately you’re dying to buy the share but there is no seller.
Auction market in short selling?
This is the point where your share gets auctioned. what is share auction? Share auction is nothing but now a scenario. where you sold it but you are not able to buy it neither at 3:10 nor at 3:20.
Market closes at 3:30 still you have not bought back the position. you have not squared off your position so tell me. what happens was it -100, yes.
it plus a hundred also, no. what is the net quantity, net quantity is still -100. you have to buy it come may and honor your contract but the market has closed. it is 3:30 now.
what happens is that your broker buys the shares on your behalf after 3:30. so there is a time slot after 3:30 for another half an hour.
we’re only brokers are allowed to participate in people like you and me retailers are not allowed to participate. These guys would try to buy those hundred shares. which were shot and they’ll buy it on my behalf.
At whatever price they buy it. I have sold it at 150 right and this guy buys it at 170. My loss will be 20 rupees per share. how did this take place this took place in a normal market or did it take place in an auction market.
The answer is it took place in an auction market. this was a very short discussion on what is the auction market. it’s a whole lot of a discussion if you want me to write a separate article on the auction market. please comment below in the comment section.