Short selling in equity investments involves selling shares that the investor does not own, with the intention of buying them back later at a lower price. Here’s an example using an Indian share:

Example:

1. Borrowing Shares: Suppose an investor believes that the share price of Company ABC, currently trading at ₹500, will decrease. The investor borrows 100 shares of ABC from a broker.
2. Selling Shares: The investor sells the 100 borrowed shares at the current market price of ₹500 each, receiving ₹50,000.
3. Price Drop: After some time, the price of ABC falls to ₹400 per share as anticipated.
4. Buying Back: The investor buys back 100 shares of ABC at the new market price of ₹400 each, spending ₹40,000.
5. Returning Shares: The investor returns the 100 shares to the broker.
6. Profit Calculation: The profit for the investor is the difference between the selling price and the buying price, minus any fees or interest paid to the broker. In this case:

• Initial sale proceeds: ₹50,000
• Cost to buy back shares: ₹40,000
• Gross profit: ₹10,000 (₹50,000 – ₹40,000)

Key Points:

• If the price of ABC had risen instead of fallen, the investor would incur a loss.
• The risk in short selling is potentially unlimited because the stock price can theoretically rise indefinitely.
• Short selling requires a margin account with the broker and incurs interest and fees for borrowing the shares.

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