Short Selling is a trading method that a trader utilizes to sell a share of Stock they do not currently own with the anticipation that the value of the Stock will decrease. Short Sellers borrow shares of stock from their broker, sell them at the market price, then wait for the price to decrease before buying the shares back to return them to their Broker. The difference between the price the Short Seller sold the shares at and the price they bought the shares back at is the Short Seller’s Profit or Loss minus any associated fees.

What Is Short Selling, and How Does It Work?

Here’s a breakdown of how short selling works, including a step-by-step method:

1.You borrow the stock

 The short seller borrows stock through a trading account from a broker.

2.You sell the stock at the current market price

 When borrowing shares, the short seller will sell them immediately at the current price in the market.

3.Wait for the stock price to decrease

  The short seller will wait for the price of the stock to drop to exit the position.

4.You buy shares back at a lower price

 At this point, the short seller buys back the same number of shares at a lower price than what he originally sold them for.

5.You return the borrowed shares

After buying back the shares, the short seller returns the shares to the broker and makes a profit equal to the difference between the price he paid for the shares and the price he sold them at.

Example of short selling:

Today ‘s Share Price: ₹1,000

The Trader Shorts 10 Shares →sells for ₹10,000

The price of the shares drops to ₹800

The trader buys back 10 shares for ₹8,000

Profit = ₹2,000 (excluding taxes and commissions)

When Is Short Selling Profitable?

• Bearish Markets
• Stocks that are Overvalued
• Negative News or Weak Fundamentals
• Technical Breakdown of Stocks below Key Support Levels
• Poor Earnings or Guidance

Proficient traders are trained to recognize the setups for short-selling opportunities through the use of both technical and fundamental analysis based on potential risk/return scenarios.

Risks Involved in Short Selling

While you can make money with short selling, it has greater risk than normal stock trading:

1.Unlimited Potential Loss (as stock prices rise to an infinite amount)

2.Margin Requirements

3.Market Volatility

4.Short covering risk

This is why proper education, discipline, and risk management are essential—especially for beginners.

Short-Selling Risk Management

To trade consistently and safely…

• Always utilize a stop-loss.
• Use correct position size.
• Do not trade in association to high-impact news.
• Trade within the parameters of strict trading rules and plans.
• Seek guidance from a professional mentor.

At NXT institutions, the leading forex trading institute in Malappuram, traders receive instruction on how to effectively manage risk across all markets (stock, forex, and derivatives).

Short Selling vs Long Trading