Never attempt short selling

Investors go through all the number crunching to find one thing- the best stock to buy.

Short sellers look for the opposite – finding out the best stock to sell.

Dint get the idea? Short sellers sell stock they don’t own with the belief it will fall from the current market price. When the price drops, they can buy the stock at the lower price, pocket the profit and return the shares to the original owner.

For example –You expect the share price of A ltd to fall. You sell 500 shares in A ltd at Rs 50 per share and just after that , the price of A ltd begins to decline. Now the price has fallen to Rs 40 Per share. At this point you buy 500 shares @ Rs 40 and ‘square up’ your position. The net effect is that you bought 500 shares @ Rs 40 and sold 500 shares @ Rs 50, pocketing a profit of Rs 5000 in the process. Good .well done! For being right, you pocket Rs 5,000 in a very short time. However, what happens if you are wrong? This is the dark side of short selling.

WHAT ARE THE RISKS ?

1. If the price rises, you lose money. Since there is no theoretical upper limit to a stock’s price, the investor’s loss is also without theoretical limits.

2. There is no way to accurately predict when a stock will fall (or rise for that matter).

3. Short selling is not for new investors.In fact ,you can’t consider a short seller as an ‘investor’. He is basically a speculator.

4. When you short sell a stock, your maximum profit is the amount for which you sold the stock. When you buy a stock – The potential is unlimited. There is no ceiling for a stock’s price. By shorting, you are taking huge risk for a small profit.

CONCLUSION

Short selling is never recommended and it’s not a good idea to sell someone’s stock and make a profit out of it. In my experience, most of these short sellers end up in financial disaster. In short selling, the potential for loss is greater than the potential for profits.

You may like these posts:

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7 Responses to “Never attempt short selling”

Asif

May 9, 2012 at 10:52 pm

Interesting observation… I assume you trade regularly… Your articles are very educational… I am still a journeyman here.

John

March 10, 2013 at 1:37 pm

I am so happy I came across your website. I’ve gone thru’ many pages and cleared a lot of cobweb. Like brokerage charges, short selling, how a new trader should go about. You have made me alert. But now I’m in a dilemna too, if I should go ahead with trading or not. Should I go for sure shot tips & trade ? Do you provide tips? any idea of any good firm that gives sure shot tips. Want to make money just enough to roll on. ofcourse human nature more is always less.

J Victor

March 11, 2013 at 7:41 am

dear john,
it always better to be an investor rather than trying to make daily money by trading.

Sandeep

February 12, 2014 at 7:34 pm

I like your website. Every citizen must know the value of long term investing rather than saving their huge hard earned money in banks which are at last eaten up by inflation.

PRASANTH AV

March 5, 2014 at 4:14 pm

YOU SAY NEVER ATTEMPT TO SHORT SELL BECAUSE U SAY THERE IS NO UPPER LIMIT FOR THE LOSS.I DONT AGREE. THERE IS ALWAYS SL ORDER TO BE EXECUTED.YOU SAY DONT SHORT SELL BECAUSE IF THE STOCK PRICE RISES U ARE IN TROUBLE. THE SAME HAPPENS IF U BUY STOCKS AND THE PRICES FALL.SO THERE IS NO LOGIC IN THAT TOO.U SAY U CANT CONSIDER A SHORT SELLER AS AN INVESTOR. THIS IS ALSO WRONG BECAUSE IF THE INVESTOR HAS STRONG FUNDAMENTALS TO ASSUME THAT THE STOCK PRICES WILL FALL AND HE SHORT SELLS IT TO BUY IT LATER, THIS IS PURE TRADING BECAUSE ITS BASED ON A CERTAIN RESEARCH.IF U RECOMMEND EVERYBODY TO BUY, THEN THE MARKET NEVER MOVES COZ THERE ARE NO SELLERS.BOTH GOING LONG AND SHORT ARE A PART OF BUSINESS STRATERGIES DEPENDING UPON THE SITUATION THAT THE COMPANY IS INTO.ONLY MAKING BUYING DECISIONS WILL NOT MAKE GOOD.BUYING AND SELLING GO HAND IN HAND.STOCK MARKET CAN BE A BUYERS OR SELLERS MARKET BASED ON THE SITUATION.

J Victor

March 5, 2014 at 5:31 pm

I agree. But let me ask you…How many people put strict stop loss? Even putting strict stop loss has its own limitations.

Again, I don’t think eve warren buffet has ever searched for fundamentally weak stock which is about to fall. That’s a wrong move to make in stock markets. The aim for any prudent investor is to BUY good stocks and not the other way. Nobody researches for stocks ‘ready to fall’ we look for stocks ‘ready to soar’
Now, after short selling if the prices move the wrong way, you’re are FORCED to close the deal. But if you buy a fundamentally gud stock and the prices move down due to market forces, there is hope for a comeback – even after 3 or 5 years. Got the difference?

There is no question of only buyers or only sellers for a fundamentally good stock. Such situations happen only In the case of penny stocks which we have already warned investors not to put money in.

Your entire argument’s aim is to oppose whatever I have said. It’s a mix of many – swing trading, fundamental research, stop loss orders, trend following, only buyers ( or sellers) situation, investing strategies – a combination of many things that cannot go hand In hand.…..

My article is written for the common man, with good intentions

Ritesh sawarkar

March 17, 2016 at 11:37 am

Very excellent reply Mr.Victor….

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