S4 E2 : WHAT IS SHORT SELLING ? MARGIN TRADING ?

Imagine This:

You go to a store and borrow a gold chain, promising to return it in a week.

But instead of wearing it, you sell it today for ₹5,000.
Later that week, the price of that same chain falls to ₹3,000, so you buy it back and return it to the store.

Profit = ₹2,000.
You sold high first, then bought low.

That’s Short Selling.

🤔 What is Short Selling — In Real Market Terms?

Short selling means selling a stock you don’t own, hoping the price will fall so you can buy it back cheaper.

🔁 Steps:

  1. You borrow shares from your broker (like Reliance or Infosys).

  2. You sell them in the market at ₹1,000.

  3. Later, the price drops to ₹900.

  4. You buy back the shares at ₹900.

  5. You return the borrowed shares.

  6. You keep ₹100 as profit per share.

📌 You make money when the stock price falls — opposite of normal investing.

💡 Why Do People Short Sell?

- To make money when they think a stock is overvalued

- To hedge other trades (like insurance)

- For intraday trading profits

⚠️ Risks of Short Selling

Unlike normal buying (where loss is limited), in short selling:

📈 Prices can go up forever —
So your losses can be unlimited!

✅ Example:
You shorted Tata Motors at ₹500.
Suddenly a news comes out — Tata launches India’s first flying car 🚗✈️
The stock jumps to ₹650.
You now lose ₹150 per share!

That’s why brokers often don’t allow short selling overnight. It’s mostly done intraday.

🧮 What is Margin Trading?

Let’s say you have only ₹10,000.
But you want to buy stocks worth ₹25,000.

Your broker says, "No problem, I’ll give you margin (loan) of ₹15,000."

This is margin trading — borrowing extra money to buy more than what you can afford.

📌 You can make more profit if the stock goes up.
📌 But you also take more risk if it goes down.

🧠 Margin vs Short Selling — Know the Difference

🔹 Margin Trading:

- You borrow money to trade.

- You expect the stock price to go up.

- You make a profit when the stock rises.

- Common in swing, delivery, and leverage trading.

- Risk: Medium to High.

🔹 Short Selling:

- You borrow shares to sell first, aiming to buy them back cheaper.

- You expect the stock price to go down.

- You make a profit when the stock falls.

- Common in intraday trading.

- Risk: Very High.

🛑 Important Notes

  1. Margin trading requires high discipline.

  2. Short selling is not allowed in delivery — it’s intraday only in India.

  3. NSE/BSE has circuit limits — you can't short sell freely in all stocks.

🔍 Real Example from Indian Market

In March 2020 (COVID crash), markets fell sharply.
Many traders shorted big companies like:

- Reliance

- Axis Bank

- Tata Steel

They sold early, bought back when prices dropped, and made profits in a falling market.

But those who didn’t understand margin and held longer… got wiped out.

📌 Final Recap

  1. Short Selling = Borrow Shares → Sell Now → Buy Later at Lower Price

  2. Margin Trading = Borrow Money → Buy More than You Can Afford

  3. Both give higher profit chances but come with higher risk

Trade only when you fully understand the risk.