What is Short Selling?
Short selling is a trading strategy where investors speculate on a stock’s price declining. Short sellers borrow shares, sell them on the open market, and aim to buy them back at a lower price to profit from the difference.
How Does Short Selling Work?
- Borrowing shares: Short sellers borrow shares, usually from their broker, hoping the price will drop.
- Selling the borrowed shares: The borrowed shares are sold on the open market at the current market price.
- Buying back the shares: If the price drops as expected, the short seller buys back the same number of shares at the lower price.
- Returning the shares: The borrowed shares are returned to the lender, and the short seller pockets the difference between the selling and buying prices as profit.
Risks of Short Selling
- Potentially unlimited losses: While potential gains are limited to the borrowed amount, losses can be unlimited if the stock price rises instead of falling.
- Short squeezes: When a heavily shorted stock unexpectedly rises, it can trigger a cascade of further price increases as short sellers are forced to buy the stock to close out their positions, causing heavy losses.
- Sudden changes in fees: The cost to borrow a stock can change frequently, making it costly to maintain a short position.
Short Selling Strategies
- Selling a pullback in a downtrend: Short selling after a temporary rebound within an overall downward trend, expecting the downtrend to continue.
- Entering within a trading range and waiting for a breakdown: Short selling while the stock fluctuates between two prices without a clear trend, waiting for a move below the range’s support level.
- Selling into an active decline: Short selling during a well-established declining trend, anticipating further price decreases.
Hindenburg Research and the Adani Group
Hindenburg Research, a US-based short seller, took a short position against Adani Group, alleging misconduct. This led to a nearly $153 billion drop in Adani’s market value, with Hindenburg reportedly earning over $4 million from the trade.
In a new report, Hindenburg alleged that SEBI Chairperson Madhabi Buch and her husband held stakes in offshore funds connected to Adani’s alleged money siphoning scandal. SEBI responded by calling Hindenburg’s claims “inappropriate” and stating that Buch had made the required disclosures.
Short selling is a high-risk, high-reward trading strategy that allows investors to profit from a stock’s decline. While it can be a legitimate trading strategy, it comes with significant risks, including potentially unlimited losses and short squeezes. Short sellers like Hindenburg Research have made headlines for their bets against companies, but their actions have also drawn scrutiny from regulators.
