Short Selling - how it works

Short selling is a trading strategy where an investor borrows shares of a stock or other asset from a broker and immediately sells them, hoping to buy them back at a lower price in the future. The investor benefits from the difference between the sale price of the borrowed shares and the lower price of their repurchase. Short selling is often used by traders who believe that the price of a particular asset will fall, or who want to hedge their portfolio against potential losses. However, this can be a risky strategy because the potential loss from a short sale is theoretically unlimited because there is no limit to  the asset's price appreciation. Short selling is also sometimes controversial, as some critics argue that it can increase market volatility and potentially lower the prices of stocks and other assets. Therefore, short selling is often subject to regulations and restrictions in various markets around the world. 

Here is an example of how short selling works: 

Suppose you believe that the stock price of ABC Corporation will decrease in the future, so you decide to use a short selling strategy. You borrow 100 shares of ABC Corporation from your broker and sell them in the market for $50 per share for a profit of $5,000. Later, ABC Corporation's stock price actually declines as expected, and the stock is now trading at $0 per share. At this point, you decide to buy back the 100 shares you sold earlier, but now at a lower price. You use the $5,000 in proceeds from the original stock sale  to buy back  100 shares at $40, costing you $4,000. You return  100 shares to your broker and keep the profit of $1,000  ($5,000 - $4,000) as a short sale profit. 

However, if the stock price rose instead of falling, you would have had to buy back the stock at a higher price than what was sold, which would have resulted in a loss. This is the risk associated with short selling.

Adani and Hindenburg Case Brief:-

In the case between Adani group and Hindenburg research happened in JAN 2023 where the Hindenburg research had put some serious allegations on the Adani group in there report which caused in the serious price fall in the shares of the Adani group and their associated companies. So here the point is what was the gain to  the Hindenburg in publishing the report against Adani group, the answer in Short Selling the Hindenburg Research had already borrowed the shares of the Adani group from the brokers and sold them at the higher market price and as now the share price of Adani group in falling they'll return the shares amount to the brokers at the current market price which is less than the previous selling price which will help them in earning profits.  At the same time if the prices of the Adani group shares rises they'll have to suffer huge losses due to Short Selling.

Here are some  pros and cons of short selling which will make it more clear about the concept:

Advantages of Short Selling-

1. Potential to profit from falling prices: Short selling can be a way to profit from falling prices in a market, which is not possible with traditional "long" investments.
2. Hedging against other investments: Short selling can help investors protect themselves from losses in other investments, by offsetting potential losses with profits from short positions.
3. Diversification: By adding short positions to a portfolio, investors can diversify their investments and potentially reduce overall portfolio risk.

Disadvantages of Short Selling-

1. Unlimited potential losses: Unlike long investments, which have a limited downside risk, short selling has unlimited potential losses. If the price of the asset being shorted continues to rise, the investor may need to buy it back at a much higher price than they sold it for, resulting in significant losses.
2. Timing risks: Short selling requires good timing, as the investor must sell the asset at the right time and then buy it back at a lower price in the future. If the timing is off, the investor may miss out on potential profits or even experience losses.
3. Interest and fees: Short selling typically involves borrowing shares from a broker, which can come with fees and interest charges that add to the overall cost of the investment.
4. Market volatility: Short selling can be risky in volatile markets, as sudden price swings can cause unexpected losses or gains.

In general, short selling can be a useful tool for sophisticated investors looking to profit from falling markets or protect against losses in other investments. However, this is a high-risk strategy that requires careful consideration and a deep understanding of the risks involved.