The term "short selling," often seen in the news, refers to:

Question

Question

Selling stocks at a loss to minimize tax liabilities.
Buying stocks with borrowed funds to maximize profits.
Selling shares to a close group of investors before they are publicly listed.
Selling a stock without owning it, with the expectation of buying it back at a lower price.

Answer 1

The correct answer is option 4.

In News

The Securities and Exchange Board of India (SEBI) is considering changes to short-selling norms, including:
- Allowing short selling for all stocks except those in the trade-to-trade (T2T) segment.
- Removing mandatory short-sale disclosures for institutional investors.
- Abolishing penalties on exchanges for short-selling settlement failures.

Key Points

Short selling is a strategy where an investor sells borrowed shares, hoping to buy them back at a lower price for a profit.
- Hence, option 4 is correct.
Types:
- Covered Short Selling – The seller borrows shares before selling them.
- Naked Short Selling – Selling without borrowing (banned in India).
Regulations in India:
- SEBI bans naked short selling to prevent market manipulation.
- Institutional investors must disclose upfront if a transaction is a short sale.
- Retail investors report short sales by the end of the trading day.
Risk: If the stock price rises instead of falling, investors face unlimited losses as they must buy back at a higher price.

Additional Information

Securities Lending and Borrowing (SLB) Mechanism: Allows investors to borrow shares for short selling.
Global Practices: Short selling is regulated in the U.S. (SEC), UK (FCA), and other major markets to prevent excessive volatility.
Market Impact: Excessive short selling can lead to short squeezes, where prices rise sharply as short sellers rush to buy back shares.