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Why is Short Selling dangerous?

Why is Short Selling dangerous?



Despite being a long-standing market practice worldwide, short-sales have been the subject of considerable debate and divergent views in most securities market. View the presentation to know about the ...

Despite being a long-standing market practice worldwide, short-sales have been the subject of considerable debate and divergent views in most securities market. View the presentation to know about the risks of short selling



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    Why is Short Selling dangerous? Why is Short Selling dangerous? Presentation Transcript

    • Why is Short Selling dangerous?
    • IntroductionMarket participants should always be aware that trading is more risky thaninvesting as trading always carries the risk of timing and speculation. Tradingrequires discipline and skills to time the market accurately.
    • When the market is bearish it presents a window of opportunity for traders tomake money by shorting stocks with the belief that the market will continueto be bearish and this is where short selling comes into picture.
    • What is Short Selling?Short-selling is the sale of shares that the seller does not own at the time oftrading. It is a trading technique an investor uses to profit from the fallingprice of a stock. It is a tactic of selling a stock without owning it, with the viewthat the price is likely to fall further and, hence, there is profit to be made bybuying it back at a cheaper price. It is considered a very risky technique as itinvolves precise timing and because it goes against the overall direction of themarket.Despite being a long-standing market practice worldwide, short-sales havebeen the subject of considerable debate and divergent views in mostsecurities market. Supporters of short-selling, view the practice as a desirableand essential feature of a securities market. They argue that in a weak market,short-covering of positions taken at the beginning of a downturn, would arrestthe declining trend. Critics of short-selling, on the other hand, are convincedthat short-selling poses potential risks and can easily destabilize the marketdirectly or indirectly.
    • In Indian equity markets, short selling is typically undertaken via the futuresand options route since short (sell) positions in the cash markets can be heldonly intra-day.But the question is whether intraday or not there is an inherent risk inadopting a short selling strategy. Firstly, market participants should be clearthat it is trading and not investing and to that extent it carries the risk oftiming and speculation. Moreover, the discipline required to see it throughgoes against an investors natural instinct and makes the position riskier.Though it is true that by short selling in many cases, the profit made can bemultifold, but then the person doing it needs to be a seasoned trader andshould also have the ability to take the risk of stock prices not moving in thedirection as expected. Because if the scenario which is envisioned doesntplay out, than the loss can be manifold and hard to digest.
    • Risks of Short Selling Short selling is a trading technique and all the trading techniques requiremarket timing and short selling is no different. When taking on a shortposition not only the view should be right but also it should be the righttime. So if a trader is assuming that the stock price will decline, it musthappen at that time only. But if that does not happen and the stock pricegoes up after it has been short sold or if it was short sell too soon and theprice takes longer to correct then in both scenarios it is likely to be a lossmaking scenario, not because the call was wrong but because the timing ofthe call was wrong
    • Trading requires discipline. A trader should always exit the market oncethe target is achieved or the stop loss is triggered. But as this discipline inmarket is against our natural instincts of fear and greed it is often notachieved and most of the times this results in losses for traders
    • Short selling as a strategy takes advantage of downward movement inprices. Historically though, individual stocks and short-term movementaside, equity markets, both domestic and global, have moved upwards.Thus, if we agree that the direction of markets is generally boundupwards, then holding on to a short position for a long time is bettingagainst the historical trend of a market and can be very risky.
    • ConclusionThus it can be said that shorting selling though a profitable strategy attimes can result in unlimited losses and it should not be used byinvestors who are new to the market and does not understand thedynamics of stock market.
    • Thank You! Read More And give us your Feedback ORIf you have any questions click on any of these -
    • • Registered office: Kotak Securities Limited, 1st Floor, Bakhtawar, 229, Nariman Point, Mumbai - 400021. SEBI Registration No: NSE INB/INF/INE 230808130, BSE INB 010808153/INF 011133230/INE 011207251, OTC INB 200808136, MCXSX INE 260808130.• Disclaimer: Investments in securities are subject to market risks, please read the SEBI prescribed Combined RDD prior to investing.• * Awarded Best Brokerage Firm in India by AsiaMoney in 2006, 2007, 2008 and 2009