Why is short selling dangerous??

It should be always kept in mind that trading is riskier than investing and trading always carries the risk of timing and speculation. Trading requires a lot of discipline and skills to time the market accurately.

When the market is at a lower point it presents a lot of opportunities for traders to make money by ‘shorting' stocks with believing that market will continue to be at its lower point and this is where short selling comes into the picture.

What is short selling?

Short selling is the disposal of shares that the seller does not own at the time of trading. It is the technique used by the traders to investors to make up the profit from the falling prices of a stock.  It is a tactic of disposal of stocks without having its ownership with a view that the price of a stock is likely to fall further and it’s good to buy these shares at a cheaper price. But this process is considered as a very risky point as it involves precise timing and because it goes against the overall direction of the market.

Despite being a long-standing market practice worldwide, short sales have been the subject of considerable debate and different views in a securities market.  People who are in the support of short-selling poses potential risks and can easily destabilize the market directly or indirectly. Indian equity markets short selling is typically undertaken via the futures and the option route since short positions in cash markets can be held the only intraday.

The question is whether intraday or not there is an inherent risk in adopting a short selling strategy.  Firstly market participants should be clear that it is trading and not investing so accordingly it carries out the risk of timing and speculation. Moreover, the discipline required to see it through goes against an investor's natural instinct and makes the position riskier.

Below are few reasons why short selling can be extremely risky

ü  It requires the timing the market

ü  Trading discipline

ü  Historically, equity markets have gone up rather than down

ü  The possibility of unlimited loss and margin costs

Thus it can be said that shorting selling through a profitable strategy at times can result in unlimited losses and it should not be used by investors who are new to the market and does not understand the dynamics of the stock market.