Short Selling and Short Covering Of Shares

They are stock market techniques in an intraday session useful to achieve good profits rather than simple buy and sell of share.

Short selling is selling of shares according to CMP (current marketing price) in a intraday market, that actually we not bought or holding.
Short covering is the actual buying of shares in markets to sustain the sell units that are virtualized before.

Traders do short selling, when they expect a downfall of stock prices. Hence heavy short selling is followed by a bear stock market and the share prices presumably decreases.
Short covering indicates a positive sentiment in stock markets. Hence a strong bull rally may occur in stock markets.

The following example illustrates how being profitable from short covering from short selling and short covering:
- Traders expect a fall in stock markets.
- He sells 1000 shares of X company at current marketing price of Rs.100/-, that we doesn’t actually bought.
- As expected market falls.
- Assume the CMP of share price is fallen to Rs.70/- and booked profits.
- His profit is 100-70 = 30 per share. Final profit may include brokerage charges and other expenses.

But always short selling and short covering were not possible in cases like:
- Trading volumes are far less than our margin available.
- Large percentage of share re holding by promoters.
- Floating vale of shares is very less.

For the above instances a new term “Renting” of share is illustratable. Where a trader rents the share from holded persons or companies, he short sells the share and at final session short covers. Finally he handover the rented shares along with little rent or interest to respected investors or company.

Below are the available options to rent or borrow the shares for short covering:
- Mutual fund houses.
- Insurance companies
- Company promoters
- Long-term investors.