What Happens If You Short Sell Shares And Do Not Have Shares To Deliver?

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oi-Sunil Fernandes

By Sunil Fernandes

Published: Saturday, July 2, 2016, 7:37 [IST]

If you regularly speculate in the market, there is a high possibility that you could be short selling shares, just as you buy shares.

Let us understand the meaning of short selling

We normally sell what we have. In the stock markets you can sell what you do not have, in both the cash and the futures and options segment.

Let us give an example. Say you sold 100 shares of ACC without having the shares in the cash market. Now, you have two options. If you have sold the shares, you must buy it back on the same day. What it means is that you should square off your position on the same day.

All on short selling of shares here

So, what happens if you short sell without having the shares?

Alternatively, you must give deliver of those shares. Now, if you have sold the shares without having the shares and cannot deliver the shares, you could be in for trouble.

The broker will conduct an auction and buy from the market. Normally, the auction price is much higher than the current market price. There could also be a penalty that could be levied on you. So, what happens is that you realize you paid a heavy price for short selling in the cash market.

In fact, the above is applicable only in the cash market. You can freely short sell in the Futures and Options market without any penalty.

Avoid short selling in the cash market

Short selling shares in the cash market could be a big trap. As far as is possible if you want to short sell, do so in the futures and options segment. However, this segment needs a lot of money and the risk is very high.

For example, if you want to short sell shares of Punjab National Bank, you require to short sell a minimum quantity of 4000 shares, while in the cash market you can short sell a small quantity of even 1 share.

This means your risk is very high in the F&O segment.

Typically, those who short sell shares are those who are bearish on a particular stock or the market as a whole. Short selling normally takes place when there is an adverse news in a particular stock. Say for example, if you know that production has halted at a particular company, you go ahead and short sell the shares on the hopes that the price would fall further and you can make quick money.

However, shares tend to bounce back as one would have to cover their short positions.

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