What Is Short-Selling
What Is Short-Selling?
There are two kinds of short-selling. In the spot market, Party A will borrow shares from Party B and sell them in the market. ‘A’ will then buy an equivalent number of shares and return them — known as giving delivery— to ‘B’
How Do They Make Money?
Let’s say Party A borrows shares when they are quoting at Rs 130 each and sells them at Rs 120. Suppose the scrip price drops to Rs 80, ‘A’ can now buy back the shares at that level. He returns the shares to ‘B’ along with a lender’s fee, and pockets the difference. But he runs the risk of incurring a loss if the share price rises instead of falling
Futures Market
Party A sells shares to Party B without owning the share. This is known as naked short-selling. ‘A’ simply has to deposit a margin, which could range from 8%-30% of the share price. Later, he can buy the share and ‘square the position’ before the last Thursday of the month. He can roll over his position for three months. Short-selling thus puts pressure on a scrip, since it is being sold in advance, in large numbers
The FII Saga
FIIs have been reportedly facilitating short-selling between P-note holders (investors in Indian markets through FIIs). The FM on Thursday seemed to indicate that FIIs might have to square up positions of short sales amongst their P-note holders. But Sebi maintained that FIIs could maintain their existing positions provided they do not create fresh ones
There are two kinds of short-selling. In the spot market, Party A will borrow shares from Party B and sell them in the market. ‘A’ will then buy an equivalent number of shares and return them — known as giving delivery— to ‘B’
How Do They Make Money?
Let’s say Party A borrows shares when they are quoting at Rs 130 each and sells them at Rs 120. Suppose the scrip price drops to Rs 80, ‘A’ can now buy back the shares at that level. He returns the shares to ‘B’ along with a lender’s fee, and pockets the difference. But he runs the risk of incurring a loss if the share price rises instead of falling
Futures Market
Party A sells shares to Party B without owning the share. This is known as naked short-selling. ‘A’ simply has to deposit a margin, which could range from 8%-30% of the share price. Later, he can buy the share and ‘square the position’ before the last Thursday of the month. He can roll over his position for three months. Short-selling thus puts pressure on a scrip, since it is being sold in advance, in large numbers
The FII Saga
FIIs have been reportedly facilitating short-selling between P-note holders (investors in Indian markets through FIIs). The FM on Thursday seemed to indicate that FIIs might have to square up positions of short sales amongst their P-note holders. But Sebi maintained that FIIs could maintain their existing positions provided they do not create fresh ones
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