Short Selling Market: Money Out of Misery

    

stockmaniacs.net

     As students of investing, many of us have encountered questions in life where we did not know the correct answer; however, we were sure which answer wasn't the correct one. Short sellers in the market make use of this rationale while choosing their investment avenues. Essentially, short selling is betting against the odds of a firm being successful in the future. It is a process whereby the investor sells borrowed stocks in the market in the hope of repurchasing them at a lower price, benefiting from the difference between the purchase price and the selling price. The concept of selling something you don't own might seem absurd, but savvy investors can use this skill to gain hefty profits.

From an investor's perspective, short selling has an array of benefits to offer. The first and most apparent one is that it provides the opportunity to make money not only when a stock goes up but also when it goes

down. Furthermore, it can be used to hedge your portfolio, which can mainly be beneficial in the event of a financial crisis such as a market crash. The losses faced in such a scenario can be offset by going short, and hence volatility of a portfolio can be reduced. Additionally, it is a simple and easy process where lesser funds are involved compared to stock markets.

On the other hand, short selling requires some careful considerations too.  A broker can recall their stock at any time, resulting in the investor being unable to cover their position and ultimately facing losses. Moreover, borrowing supplies in times of a liquidity crunch can be a challenging task. An investor has to speculate the future trend in the price of stock accurately to make profits. Also, short selling can be seen as a way of pushing the market in a bearish direction unnaturally. As a result, at times, the government can impose a ban on short-selling to restore stability.

To conclude, it can be seen that short selling, like any other form of trade, has its own fair share of opportunities as well as risks. An investor has to have an understanding of the market and be aware of the multiple facets of short selling before taking a plunge into this type of a trade into the market. 

-Manan Pahwa Student -NMIMS