What Is Short Selling Of Stock | Earn Money From Falling Stock
Friends, you know that profit can also be made from falling stock. Most people know that when their share prices increase, then only profits are made. But this is not true, a falling stock can also make a profit. Short selling strategy can make good profits from your falling stock. So today we will know everything about short selling.
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Hello friends, I am Manish Patel, today I will tell you what is short selling and what are its advantages or disadvantages.
What is short selling stock?
Generally, we buy shares because when the price of this share increases, you can make a profit by selling it. But this is exactly the opposite in short selling. You understand this with a common example that what is short selling stock.
Suppose your friend needs a home and he asks you to get home. You take 1.5 million rupees from your friend to buy that house. But you sell that house to your friend for 2 million.
Thus you made a profit of 0.5 million without any investment. So you did short selling in this case. That is, you sold that thing that you do not own. And when it came time to deliver that item, you bought it from the seller and deliver it to Buyer.
You understand from this example that Short selling means that you sold that thing that you do not have. When the price of share increases in the normal share, then we sell our share.
But in short selling, when we expect that the prices of this stoc nok will fall tomorrow, then we sell our shares today. And when the price of this share goes down tomorrow, then we will buy it. Here the difference between the price of yesterday and today became my profit.
There are two mechanisms of short selling.
1. Intraday: In this, you have to sell the stock before the coming price result of any share. In this, you get only one day’s time for short selling. Suppose the share value of a company is currently 100 dollars and you know that the share of this company will decrease in the evening. Before Evening, you sold that share to someone for $ 100. And when the results came out in the evening, the stock was valued at $ 50.
When the value of the stock decreased, then you bought that stock and delivered it to that person. In this way, you made a profit of 50 dollars. That is, you can earn profit by selling the shares that you do not have. But you have to do that work in one day.
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You may be thinking, how can I sell the shares that I do not have? I gave you an example of selling a house first. Take $ 100 in advance from that you want to sell the shares of that company, and after the share price decreases in the evening, you have to buy that share and distribute that person.
Take $ 100 in advance from the person you want to sell the shares of that company, and after the share price decreases in the evening, you have to buy that stock and distribute it to that person.
2. Short term: In this, you take a share for short term i.e. 1 and 2 months and then sell it. Think of it this way, assuming you borrow a share and you know that it will be lower in the price for the next two months, then you sell that stock today for $ 10 and suppose that after 2 months, it became $ 5, so you bought that share for $ 5 and gave it to the person from whom you borrowed those shares.
This is possible by the share landing and burrowing mechanism means SLB mechanism. This mechanism is for those who hold their shares in D-Mart and they have no plans to sell that share in future but they want them to get some profit from those shares. For this, they lend some of their shares to someone and take interest from them in return.
What is the disadvantage of short selling?
1. The first danger in this is that you are going against the general market direction. Normally people sell their shares when the price of shares increases but you are selling when the share price decreases that means, you are reducing the probability of earning more money.
2. Suppose you are doing short selling and do not buy any of your shares by the end of the day. In such a situation, the broker will try to buy any shares from the market for you. Suppose there is no trading happening in that market.
So in such a situation, brokering will not be able to buy any shares for you on that day. Then in this situation, you will be declared a defaulter and the stock exchange will impose a heavy penalty on you.
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