Shorting is just a simple market view. Just like people purchase stock when they expect it to go up, they sell it when they expect it to go down. It's normally a directional outlook and nothing else.
Published on 17 March 2023
Let's say a person owns 2000 shares of Tata Motors and expects the stock to correct sharply due to JLR's poor performance. What would they do? They would sell the inventory and wait for a better price to enter later. What if they didn't own the stock? The answer is that they can also short the stock without delivering the stock.
When to short a stock? There are two options: one can either short on the spot market or futures market. We got you covered in this blog. Here’s everything you need to know about Shorting in Futures and Options.
Shorting, or short selling, is a trading method in which a trade is opened with a sell order in anticipation of a down market movement. Short positions are common practice for experienced traders, but there are significant barriers to shorting certain assets for new traders. One of the most obvious benefits of futures trading is that it allows traders of all levels to sell in their preferred markets easily.
There are two ways to sell a stock without owning it:
Short selling on the spot market has one limitation, it must be done on an intraday basis. This means that you can initiate the short trade anytime during the day, but you must purchase back the shares by the end of the day before the share market closes. You cannot carry the short position forward over multiple days. To understand why spot shorting is strictly an intraday affair, you should know how the exchange treats the short position.
Also Read: Intraday Trading Time Period Analysis
When you are shorting on the spot market, you are clearly selling first. When you are selling a stock, an internal process notifies the exchange that you have sold a specific stock. It does not differentiate between the general sale (in the Demat account) and the short sale of stocks. From their point of view, they believe you sold the stock, so you should offer the same. To do this, you should have the stock in your Demat account ready for the next day. However, the exchange will only know about your obligations after the market’s closing and not during market hours.
Short selling shares in the futures sector does not have the same restrictions as selling shares in the spot market. In fact, this is one of the most important reasons why futures trading is so approved. Remember, a “future” is a derivative that simply mimics the movement of its underlying asset. So, if the underlying price goes down, so does the futures. This means that if the stock is bearish, you can short the futures and hold the position overnight.
So, similar to posting margin when taking a long position, the short position would also require posting margin. Margins are similar for long and short positions and don't change. Short selling futures is very similar to buying futures, except that you can only profit when the price goes down when you are shorting.
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