Short selling is a transaction where an investor sells a security they do not own by borrowing it, expecting to buy it back later at a lower price.
Short selling helps market efficiency because it allows investors to act when they believe a security is overvalued.
Example:
Suppose a stock is trading at ₹1,000, but an investor estimates its intrinsic value to be ₹800.
The investor may short sell the stock at ₹1,000. Later, if the price falls to ₹800, the investor buys it back.
Profit per share:
₹1,000 – ₹800 = ₹200
If the investor short sells 100 shares, total profit will be:
₹200 × 100 = ₹20,000
Short selling adds selling pressure to overvalued securities, helping prices move closer to fair value.
However, if short selling is restricted, overvalued stocks may remain overpriced for a longer time.