Explained: What to do if your shares are short sold
Many investors make money through short-selling when the stock market is bearish.
Though most of us buy stocks and wait for the time when they appreciate to make a profit, you can also make money from the stock market even when shares are falling. Many investors make money through short-selling when the stock market is bearish. This stock market instrument is also used to offset the losses when shares start falling due to unexpected events.
How to make money when the share market is bearish?
"Traders go short in anticipation that their stock will tumble. When traders expect that a stock will go down, they sell the share to buy at a lower price later in a future date. The margin between the stock sold and bought is the profit of the trader," said Sanjeev Das, a consultant trainer and technical analyst at BSE Institute Ltd, Delhi. Short selling makes it possible that investors can sell shares which they do not own.
They borrow the stock from a broker and immediately sell it at its current market price. The sale amount is credited to the short seller’s margin account. The short sellers have to buy the share back when they find it to be a suitable time. The traders have to repay the amount they had borrowed from the broker at a current market price of the stock.
The short seller's profit is the difference between the sale price and the purchase price. For example, if a trader sells a stock at Rs 100 and the stock goes down to 90. The difference (Rs 100 - Rs 90 = Rs 10) is the profit of the trader. The trader will incur a loss when the stock sold is appreciated, Das said.
"However, this should be exercised with caution. If a trader fails to buy the stock at the right time when the stock is at its lowest point then they may incur a loss," Das added.