It is a system in which a trader can borrow shares that they do not already own or can lend the stocks that they own.
An SLB transaction has a rate of interest and a fixed tenure.
For example, you have a negative view on the price of a stock. You can borrow shares from SLB and sell them. You can buy them back if and when the price falls. Your profit is the difference between the selling price and the buying price, after deducting the interest rate.
Let’s say stock price of Company Z is trading at Rs. 200. You decide to short sell 100 shares of Z for a total of Rs. 20,000.
Suddenly, disappointing quarterly profits cause the share price of Z to fall to Rs. 190. You can now buy 100 shares of Z for Rs. 19,000.
You then return the shares of Z to the lender who accepts the return of the same number of shares lent, regardless of the fact that the shares prices have fallen.
You retain the Rs. 1,000 difference (minus interest and other costs). You make a profit.
Short selling helps you benefit from the downturn.
It can reduce potential risks and losses.
It increases liquidity for the trader.
Securities on which derivatives are available can be used for SLB transactions.
The tenure of SLB transactions is up to 12 months.
Lending fee is quoted on per share basis. Lending fee may be on the cost which the borrower expects to pay, or it is based on the annual yield expected by the lender.
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