Short Selling 101

With the markets touching new highs and new investors pumping whatever little they have, there have been more talk of 'short selling' or 'shorting'. Here's a primer on what that is.

When for some reasons you believe that a stock is going to rise in value, you are said to be 'long' on that stock ('bullish'). On the contrary, if you have reasons for its decline, you are said to be short on that stock ('bearish'). Shorting is how you bet on stock depreciation.

Let's consider a scenario wherein your friend TIPindra working at Amazon tipped you that AMZ would soon be selling iPhone 12 at INR 50K. Sensing an opportunity, you went to your friendly neighbourhood dealer and borrowed the phone from him. You then sold this on the same day at INR 70K which was the current price for iPhone 12.

Few days later when the prices at AMZ actually dropped, you bought the phone at 50K and returned this to your dealer with an additional 3K as an 'interest' for his trust in you. Still, you've made a profit of 17K from this!

Now, of course, if you were wrong and the prices had indeed risen, you'd have to buy a costly phone to 'cover' your 'short'; but, again, you took that risk.

So that's all about short selling. For a live example, you can search for what’s happening with Gamestop.

Thanks to Sahil for this thread.