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How to Short Sell Shares in Equity and Futures

29 Nov 2023

Introduction

Short selling is a financial strategy with active fluctuation. It's a calculated move, with traders making money as markets go up and down. Imagine selling shares you do not yet own, hoping their value will decline. The art of short selling involves walking on a thin line between risk and profit. Read on to learn more.

What is short selling?

Short selling is a strategy where a trader acquires shares from a broker and sells them immediately, hoping for a drop in the prices. If the price falls, the trader can purchase and return the shares to the broker at a cheaper cost, keeping the difference as profit. The profit must have all the interest costs, if any, reduced from it.

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How can someone short a stock?

You can divide the process of shorting a stock into the following steps:

  • At first, a trader requires a margin account. They will be charged with interest when they borrow shares from the brokerage, i.e., a margin loan. 
  • A trader must have cash or stock equity in their margin account to cover at least 50% of the value of the short position. Traders can place a short-sell order in their brokerage account after this condition is met.
  • To keep the short position open, the trader must retain at least 25% of the minimum required by the exchange for equity in the account. This acts as collateral for the margin loan.
  • The trader can keep the short position open as long as they need (i.e., hold on to the borrowed shares). They must fulfil the margin requirements during this period. 
  • The trader must pay interest on the borrowed shares as long as they hold them.
  • The trader can close a short position if the stock price declines. This can be done by purchasing the number of borrowed shares at a lower price and returning them to the brokerage.

How to short-sell in the futures?

The procedure for short-selling in futures is an interesting one. Let’s understand.

  1. Identifying futures contracts to purchase or sell an asset at a pre-set price and date. It involves trading futures contracts to repurchase them later at a lower value.
  2. Investing in the suitable futures market to align trading objectives with the assets intended for short sell.
  3. Opening a futures trading account with a brokerage to access the required markets to trade futures. The trader must ensure the brokerage provides trustworthy trading platforms and low commissions.
  4. Putting in a short sell order for the futures contract, the trader wants to trade after funding their futures trading account. The brokerage will carry out the order, opening a position for them.
  5. Monitoring the market carefully as futures prices fluctuate, and then closing the position. The trader can buy back the futures contract to close their position when they think the price has reached their profit target.

How to short-sell in equity?

Short-selling in equity has different steps compared to when dealing in futures.

  1. Open an account with a brokerage offering the service. The trader must look into trustworthy brokerages with a proven track record of successful execution.
  2. Find stocks that are appropriate for short sales. For information on available shares, you can talk to the brokerage and get vital insights.
  3. Place a short sell order to sell the borrowed shares. The order will be carried out by the brokerage, and the shares will then be sold on the open market.
  4. Manage risk, since the stock price might fluctuate aggressively. You can use risk management techniques to reduce possible losses.
  5. Repurchase the shares to close the position. The process of short selling will be finished at this stage. The profit or loss will depend on the difference between the selling and purchase prices.

To conclude

Your approach to short selling should be cautious, backed up by extensive research. Always perform due diligence, put risk management techniques into practice, and keep up with market conditions.

 

Popular Stocks:  ICICI Bank Share Price | HDFC Bank Share Price | Britannia Share Price | Divislab Share Price | Tata Consumer Share Price

 

Related Articles: Using futures as a form of Margin Trading in Stocks | What is Mark to Market Margin in Futures and Options and when is it Applicable? | The importance of operating margins for a company

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