How does short selling work?

Capitalmind Podcast

“A market without bears would be like a nation without a free press. There would be no one to criticize and restrain the false optimism that always leads to disaster”

- Bernard Baruch

Short selling is mostly misunderstood and often demonized. Quite understandable, it's difficult to put your head around a concept that involves selling something that you don’t already own. But, it’s not as sinister as it is made out to be. Markets have enough checks and balances to accommodate short sellers and maintain their balance.

Recently, we saw Adani group stocks come under attack by a US-based short seller which resulted in the marketcap of the group falling more than 50% within a month.

This sparked a discussion on the concept of short selling. We're not going to talk about the specifics of this short by Hindebug. Instead, in this episode, we will talk about the nuances of short selling, their impact on the market, and dive deeper into how the whole thing works.

Join, Deepak & Shray, as they talk about:

• How does short selling work?
• Is short selling always to bring down a stock?
• The operational aspects of short selling in India and the US?
• Examples of different short trades & how they played out
• Which market players, except short sellers, also short stocks?

Show Notes & References

1:10 What is short selling

5:15 Why people would do short selling?

11:30 Are HFTs also market makers? Or speculators?

13:30 Paul Tudor Jones and the 80s crash

19:30 How do Indians short a stock?

23:00 How do US traders generally short a stock?

33:00 NSEL fiasco

42:00 Do arbitrage mutual funds also short sells stocks?

45:00 How does a foreign fund short an Indian stock?

47:00 Should short selling be illegal?

49:00 Can a PMS (like us) go short and benefit from such trades?

54:30 The thing called "short squeeze" and stories from far & recent past