Short-selling

The report on short-selling by Hindenburg recently prompted the Supreme Court to instruct the Securities and Exchange Board of India (SEBI) to use its investigative powers to determine if these actions constituted a legal violation and harmed investors.

What is Short-selling?

• Short selling, also known as “shorting,” “selling short,” or “going short,” involves the sale of a security or financial instrument that the seller has borrowed.
• The short seller anticipates that the borrowed security’s price will decrease, allowing them to repurchase it at a lower price and profit from the difference.
• The profit or loss for a short seller is determined by the difference between the price at which the security was sold and the price at which it was repurchased.

How short-selling works:

• Borrowing: The investor borrows a certain quantity of an asset (such as stocks) from a broker or another investor.
  • The borrowed assets are typically sold in the market, generating cash for the investor.
• Selling: The investor sells the borrowed assets at the current market price.
• Waiting for Price Decline: The investor waits for the price of the borrowed assets to fall.
• Repurchasing (Covering): Once the price has dropped to a desired level, the investor buys back the same quantity of assets in the open market.
• Returning the Borrowed Assets: The investor returns the assets to the lender.
• Profit or Loss: The profit or loss is calculated based on the difference between the selling price and the repurchase price.
  • If the repurchase price is lower than the selling price, the investor makes a profit.
  • If it’s higher, the investor incurs a loss.

Ref: Source