What is Short-Selling?

Short-selling is a popular trading strategy used by investors to capitalize on a falling market. It's a way of betting against a stock or security by borrowing shares from a broker and selling them, hoping to buy them back at a lower price. While short-selling has been around for centuries, intraday short-selling has become more prevalent in recent years due to advancements in technology and changes in regulations. 

Intraday short-selling is a type of short-selling where traders take advantage of price movements during the trading day and close out their positions before the market closes. In this article, we'll take a closer look at intraday short-selling, how it works, and some tips and strategies to help you succeed. Whether you're an experienced trader or just starting, this article will give you a better understanding of this powerful trading tool.

What is Short Selling?

Short selling is a trading strategy where an investor borrows stocks from a broker and sells them in the market, expecting the stock price to decrease in the future. The investor will then buy back the shares at a lesser price and return them to the broker, keeping the difference as profit.

Intraday short selling is a form of short selling where the investor buys and sells the shares within the same trading day. This is possible because, in intraday trading, the shares are not physically delivered to the buyer, and the trade is settled in cash. Intraday short selling can be a profitable strategy if the investor can correctly predict the stock price movement and exit the work before the end of the trading day.

However, like any trading strategy, there are risks involved in intraday short selling. The investor will then buy back the shares at a lesser price and return them to the broker, keeping the difference as profit. In addition, there is a risk of the broker recalling the shares before the investor has a chance to buy them back, which can lead to a substantial loss. 

Start Your Stock Market
Journey Now!

50 Years Trust |₹0 AMC |₹0 Brokerage *

Table of Content

  1. What is Short Selling?
  2. How Does Short Selling Work?
  3. Intraday Short Selling Advantages and Disadvantages 
  4. Intraday Short-Selling Tips and Strategies
  5. When Does Short Selling Result in Loss?
  6. Naked Short Selling
  7. Short Selling Metrics

How Does Short Selling Work?

  • Short selling is a trading strategy investors use to profit from a declining stock price.
  • In intraday short selling, the investor sells the stock at the beginning of the trading day and buys it back before the end of the day.
  • This strategy is used when the investor believes the stock price will decrease during the day.
  • To place a short-selling order, the investor must select the option MIS (Margin Intraday Square-up), indicating that it is a short-sell order.
  • Margin payments are required for intraday orders, although these can be lowered by placing Cover Order (CO) or a Bracket Order (BO).
  • A CO adds a stop-loss order, while a BO includes a stop-loss order and a profit target.
  • It is important to note that intraday short-selling orders must be closed out on the same day.
  • Brokers run a Risk Management System (RMS) check around 3:15 pm and will automatically close out any pending orders.
  • Intraday short selling can be a profitable strategy if executed correctly, but it also carries significant risks.
  • Investors should conduct thorough research and analysis before making any trading decisions and should always be prepared to cut their losses if the market moves against them.

Intraday Short Selling Advantages and Disadvantages 

Intraday short selling allows traders to gain from decreasing markets, demonstrating flexibility and portfolio diversification, but carries a high risk due to large losses, high margin requirements, and limited return potential. Here are some advantages and disadvantages of intraday short selling:

Advantages of Short Selling

Disadvantages of Short Selling

Opportunity for profit from falling stocksHigh risk of substantial losses if the stock price rises instead of falling
Flexibility in capitalizing on short-term price movementsMargin requirements in a broker's margin account can be high
Diversification potential for portfolio hedgingLimited profit potential as stock price can only drop to zero but can theoretically rise to infinity

Intraday Short-Selling Tips and Strategies

It is a risky but potentially lucrative trading strategy that requires carefully analyzing market trends and risk management strategies. Here are some tips and strategies for successful intraday short selling:

Click here to know about intraday trading tips

Intraday Short Selling Tips

  • Always have a clear exit strategy in place before entering a short trade
  • Place stop-loss orders to reduce potential losses if the market moves against you.
  • Keep an eye on the overall market trend and be aware of any potential news or events that could affect your trade
  • Begin small and progressively raise your position size as your experience and confidence grow.
  • Stay disciplined and avoid emotional trading decisions based on fear or greed

Intraday Short Selling Strategies 

  • Technical analysis: Use Intraday trading chart patterns, indicators, and other technical tools to identify potential short-selling opportunities based on market trends and momentum
  • Fundamental analysis: Analyze financial statements, earnings reports, and other key metrics to identify overvalued or underperforming stocks that could be good candidates for short-selling
  • Pair trading: Short sell one stock while buying another stock in a related industry to hedge against market volatility and minimize risk
  • News-based trading: Take advantage of market reactions to news events, such as earnings reports or economic indicators, by short-selling stocks that are expected to perform poorly. 

When Does Short Selling Result in Loss?

A trader faces limitless losses if they make an incorrect prediction on the decline in share prices. In the case of short sales, when the strategy is to "sell high and buy low," the phrase "infinite risk" is especially applicable. 

In the traditional trading strategy, a trader buys shares at a certain price with the expectation that they would increase in value so the trader may sell them later on and benefit from it. In that scenario, a trader's risk is restricted since they can only lose as much as their investment, even if share values decline. If share prices rise against expectations while short-selling equities, they may do so indefinitely, exposing the trader to unbounded danger. 

Naked Short Selling

  • Naked short selling occurs when a trader shorts a stock without borrowing or arranging to borrow the shares beforehand.
  • This practice results in the inability to deliver the shares to the buyer during the clearing period, termed a "failed to deliver" trade.
  • The trader must borrow the shares or close the position to fulfill the transaction obligation.
  • Naked short selling is illegal in many countries due to violating demand and supply principles.
  • Engaging in significant quantities of naked short selling has the potential to disrupt and destabilise the market, impacting its overall stability and functioning.

Short Selling Metrics

Traders often use two key metrics to identify potentially overvalued stocks or those expected to decline:

  • Days to Cover Ratio: This statistic, also known as the short interest to volume ratio, contrasts the total number of stocks held short with the volume of trade occurring right now. It gives information on the degree of demand for a stock. Generally speaking, a high ratio indicates a negative tendency for the stock.
  • Short Interest Ratio: With this ratio, the total number of stocks accessible in the market is contrasted with the number of shorted stocks. Significant short interest is indicated by a high ratio, which implies a probable future price fall. The possibility of a short squeeze, in which short sellers are compelled to cover their positions at higher prices due to rising stock value, can also be increased by a high short-interest ratio.

Overall, understanding intraday short selling is crucial for anyone looking to engage in this trading strategy. Short-selling is a technique used to profit from falling stock prices and involves selling borrowed shares with the hope of buying them back at a lower price. However, this strategy carries significant risks and requires careful consideration and planning. 

As such, it is essential to conduct thorough research and consult with experienced traders before engaging in intraday short selling. With BlinkX, you can access a wealth of resources and expert advice to help you navigate the complex of intraday trading successfully. Start your journey today by downloading the share trading app and take advantage of the many benefits that BlinkX has to offer!

Intraday Short Selling FAQs

There is no specific duration for holding a short-selling position, and it can be held indefinitely but for the shorter period which can be closed within a trading session

Yes, intraday short selling is considered a high-risk strategy, as it involves borrowing stocks and betting that their price will go down, which may not always happen.

No, short selling can be done for intraday and longer periods.

Yes, short selling is legal in India, but naked short selling is not permitted, and investors must deliver the securities at the time of settlement.