Published: 24th Feb, 2023
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Naked Short Selling
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Context
After Hindenburg Research, a US-based short seller, released a report on the Adani Group, several questions have been raised on short selling – if it’s ethical, how it’s done, is it legal in India.
About
What is short selling?
- Short selling involves borrowing stock you do not own, selling the borrowed stock, and then buying and returning the stock only if and when the price drops.
- It’s completely opposite to how a bullish transaction takes place.
- In such transactions, you buy a stock hoping the price will go up. You wait until it goes up to a certain extent.
- However, short selling is mostly done to earn in a falling market. In this case, the investor is bearish on the markets.
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Example: For instance, an investor borrows a certain number of shares from a broker, and sells these shares in the market for Rs 100. In the future, when the price of the shares fall to Rs 80, then the investor can buy them at a lesser price, return them to the broker, thereby making a profit of Rs 20. |
Is it legal?
- Securities market regulators in most countries, particularly in all developed securities markets, recognise short selling as a legitimate investment activity.
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