Can we sell shares without buying in intraday? It is one of the confusing questions of the stock market, which confuses many new investors. In this post, I will be giving information about the same and will help you understand short selling, whether we can sell shares without owning or not, and its example. Along with this, we will also understand when it can be profitable and can lead to loss. So, if you want to learn this vital concept or activity of the share market, then read this complete blog.
We should understand short selling before we start understanding whether we can sell shares without buying in intraday trading.
What is Short Selling?
Short selling is the term or the activity that involves the borrowing of the share which the trader or investor does not own. It also includes selling the borrowed shares and purchasing again when prices decrease intraday.
If you are a new investor, then it may seem impossible to make money by this technique, but short selling is also used to earn some profit and work. However, you should avoid this approach to make money from the stock market because it is riskier than the other approaches.
Can We Sell Shares Without Buying in Intraday?
The investor can use the short selling method to sell the shares without buying those in Intraday trading. It is a risky approach; hence the new trader should stay away. Also, it requires an experienced guide to make this trading successful. We will discuss more profit and loss in short selling below. However, it is possible to sell the shares that the trader does not own, and the trader borrows some portion of shares from the trader’s broker and sells intraday. Once the prices of shares fell, traders purchased again and returned to the broker.
Example Of Short Selling In Share Market
Let’s understand how you can sell shares without buying those in the share market with an example. Suppose Trader A is willing to earn some profit by doing short selling, so he goes to a broker and requests him to sell the 100 shares currently selling at Rs1000 on his behalf. The broker gets agreed and executes the trading for the same. When the same share’s prices fall, trader A advises his broker to repurchase the 100 shares at the reduced cost of Rs500. So, in this way, the trader sold the shares for Rs1,00,000 and purchased for Rs50,000, and earned Rs50,000 as a profit.
However, this transaction can result in loss, so let’s understand when the short-selling can be profitable and cause a significant loss.
When Can Short-Selling Result in Profit?
Short selling can be a profitable transaction if the trader speculates the trading scenario wisely by seeing and analyzing the right trend. Because in this way, the trader can earn a profit if the market prices of the stock go down. And once the trader sells for a higher price and buys the same when prices go down, they earn profit.
Example of Profit in Short Selling
A, who is a trader in a share market and decided to use short selling. He speculated that the prices of stocks of XYZ would go down because its shares are currently selling at Rs500 each, which is an overvalued price. So, he goes to his broker and asks him to sell the 20 shares on XYZ’s behalf, and the concerned broker does the same. After some time, the speculation of Mr. A goes right, and prices of XYZ’s shares fall to Rs 400 per share. To take advantage of this scenario, Mr. A repurchased the 20 shares of XYZ and made Rs2000 as a profit. Also, he returns the shares to his broker from whom he borrowed earlier.
When Can Short-Selling Result in a Loss?
If the trader makes the wrong prediction, he may also have to face a significant loss. There is infinite risk involved in short selling because if the prices of shares increase rather than decrease, traders have to pay for the increased value. And it will be the complete opposite of selling at a high price and buying at a low price. The major drawback of such trading is that traders have to face unlimited risk because the prices of shares can skyrocket suddenly, and prices wouldn’t come down.
Example Of Loss In Short Selling
Let’s take the earlier example, where Mr. A decided to trade by short selling and choose the shares of XYZ. Currently, the prices of XYZ costing Rs500 per share, and Mr. A predicted the prices would go down during the day and requested his broker to sell XYZ’s 20 shares in the market. But suddenly due to some good reasons the prices of these shares go higher at Rs1000. As accepted there will increase more; therefore, to limit his loss, he purchases XYZ’s shares again but at an increased price of Rs1000 each. Now, A paid 20000 on the repurchase of these shares, which caused him an Rs10,000 loss.
Advantages of Short Selling or Selling Shares You Not Own
Short selling has some advantages that a trader should know before going to invest in short selling.
- If the prices of shares or stocks go down, then there is the possibility of earning a good profit.
- If you want to do margin trading, then short selling is the option for you.
- You can use short selling to reduce the risk or give additional risk protection for your trading portfolio.
Disadvantages Of Short Selling Or Selling Shares You Do Not Own
There are some disadvantages of short selling that you should not ignore at all.
- There is infinite risk involved in short selling, and it can result in a massive loss.
- It would be best if you were an experienced trader to understand the market and speculate more efficiently.
- The stock market is dynamic; hence the trend can go up and down at any time. Therefore it is hard to make the correct prediction.
Short selling is a risky or sophisticated investing approach used in the stock market. It is suitable for experienced traders with a strong understanding of the share market and can bear some risky solid transactions. However, you can sell the shares without buying intraday or sell shares not owned by you. I hope you find this post informative and essential for your trading journey in the stock market. If you want to keep learning core concepts of investment or trading in the stock market, stay tuned with us.