Short selling is a technique used by traders to earn profit from falling price of a stock by selling stocks which they do not own at the time of trading. Traders sells stocks without owing it with an expectation that its price is likely to fall further and profit can be realized by buying it back at a cheaper price. This is a very risky technique and requires very good knowledge about market to succeed. Financial advisory services providers can help in managing risk and returns in a better way while trading in market. In Indian stock market short selling is usually practiced in futures and options.Trading is riskier than investing as here risk of timing and speculation is always present.When market is following bearish trend it brings opportunities for traders to earn good profit by shorting stocks and this is how short selling came into existence.
Following are the reasons which will explain how short selling is dangerous :
1) Right timing is required
Like all trading techniques short selling also requires right market timing. While taking short position not only view but also timing should be right. As traders have an expectation here that prices are likely to fall further then it must fall at the right time. And if it does not happen and stock prices rises after it has been short sold, then a trader may earn negative returns in such case.
2) Unlimited loss
An individual try to make limited profit by getting involved in the risk of unlimited loss with this trading technique. If in case prices do not fall to level as it was expected then loss on the transaction depends on the level to which price goes up before a trader is able to close its positions. As price of a stock can not go below zero therefore with short selling profit is limited and loss is unlimited .
3) Historically market has followed upwards trend more
Short selling is advantageous only if market follows a downward trend but historically equity market have moved more upwards. And if market tends to follow upwards trend then holding on short position for long time can be very risky .
Short selling can be profitable at times but new investors and traders should avoid using it as they do not have a good understanding of markets behavior.Experts recommendation on trading tips, mcx tips and more can also be considered to be on the safer side and earn well. In order to become a successful trader it is required to follow a disciplined trading practice i.e square of your position once you hit the target or stop loss. But because of greed and fear traders fails to follow such practice and ends up by earning losses for themselves. This should not be the case. Restrict yourself to always follow right trading path and have a good understanding of market conditions before taking any decision.