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What is short selling?

Short selling is a a trading technique a trader uses to profit from the falling price of a stock. It is a technique of selling a stock without owning it, with the view that the price is likely to fall further and, hence, there is profit to be made by buying it back at a lower price.

When the market is bearish or in downtrend, it presents a window of opportunity for traders to make money by 'shorting' stocks with the hope that the market will continue to be bearish and this is where short selling comes into picture.  

Is short selling dangerous?

To start with, traders should be aware that short-selling is trading and not investing. They should also be aware that trading requires lot of skills and discipline and there are risks involved with it. To find whether short selling is dangerous or not, let us look at some of the key points below.

•  Historically, individual stocks and equity markets, both domestic and global, have moved upwards (short-term movement aside). Thus, if we agree that the direction of markets is generally bound upwards, then holding on to a short position for a longer time is betting against the historical trend of a market is very risky. 
• A trader should always exit the market once the target is achieved or the stop loss is triggered. But as this discipline in market is against our natural instincts of fear and greed and lack of such discipline, makes the position riskier. 
• Theoretically, one stands to make only limited profit on a short sell with chances of unlimited loss. This is because, the stock price can rise to any level, whereas the gain is limited since the stock price cannot go below zero. 

In Indian equity markets, short selling is typically undertaken via the futures and options route, since short positions in the cash markets can be held only intra-day. One may not be able to carry forward short positions in cash markets, since stock lending and borrowing is yet to kick in a big way to facilitate short selling in cash markets. As for as the futures  are concerned, the quantity or the lot sizes of the stock futures are so high that many are not aware of the huge risks involved in short selling such instruments.

To summarize, though short selling could a profitable strategy occasionally, it could result in substantial losses and it should not be used by investors or traders who are new to the market and who do not understand the dynamics of stock market.

If you were hiking in the mountains and stopped in a small river for a drink only to look up and see a bear charging at you, what would you do? Our instinctual reaction in a life-threatening situation, such as being charged by a bear, is to run. But wilderness experts will tell you that instead of running from a bear, you should curl into a small ball.

The moral of the story is that you can’t outrun a bear. And the same is true of metaphoric bears — a bear market, for example.

Anyone who has invested in the past decade, and especially in the past five years, has seen what finance people call a "bear market". What is a bear market? In the most basic terms, it is exactly what it sounds like: a confluence of unfortunate factors that make the stock market a terrible, scary place to be, especially for inexperienced investors.

Our instinctual response to a bear markets is the same as our reaction to a live bear — we want to run. We want to scramble and get out as soon as possible to protect our investments. The thing about a bear market, though, is that it is a natural period of decline. Inevitably, after a period of large gains, the market will sink. Here are three ways to handle a bear market and come out with all your limbs intact:

1. Don’t run. Just as with real bears, trying to run away from a bear market by selling out and transferring your assets into a cash market will generally yield worse results than just staying put. In fact, by trying to run, you only lock in your losses. Volatility in built into the market system, so you can’t let a bad spell shake your faith. If the market is down, the damage is already done to your investments, so don’t make it worse by jumping ship. Instead, plan for the troughs by taking a long-term approach. If you do this, you’ll be in an optimal position to ride the wave back to a prospering market when it recovers.

2. Take stock. One way to take a long-term approach is to review your asset allocation when the market is down and readjusting the mix based on your risk tolerance. Wise investors will tell you that you should be re-balancing your portfolio at least once a year anyway, regardless of how the market is doing.

3. Be consistent. It’s very important to stay the course, even when the market is down. Typically this means that you should continue to add to your portfolio as you would when the market is up. This strategy is called dollar-cost-averaging — if you have a set amount of money you invest each month, buying more when prices are low and less when prices are high, the average price per share you’ll pay will be less expensive than the standard average share price.

Timing the market is as difficult and futile as running from a bear. So curl up, and wait for the bear to drop you, and you’ll be likely to outperform others who try to run.

By-line:
Alvina Lopez is a freelance writer and blog junkie, who blogs about accredited online colleges. She welcomes your comments at her email Id: alvina.lopez at gmail dot com.

National Buildings Construction Corporation NBCC is coming out with an IPO of 12,000,000 Equity Shares of Rs. 10 each by way of an offer for sale of Equity shares by GOI. The company, started in 1960, is one of the few public sector companies engaged in the business of (i) project management consultancy services for civil construction projects (PMC) (ii) civil infrastructure for power sector and (iii) real estate development.

The company is headquartered in New Delhi and in addition has 10 regional / zonal offices across India. The projects undertaken by the Company are spread across 23 states and 1 union territory in India.

Issue Details:

Issue Open: Mar 22 - Mar 27, 2012.
Issue Size: 12,000,000 Equity Shares of Rs. 10.
Issue Price: Rs.90-Rs.106.
Listing At: BSE, NSE.
CARE Rating: 4 indicating above average fundamentals.
A Discount of 5 % on the Offer Price shall be offered to Retail Bidders and Employees.

Positives of the company:

1.Established brand name and reputation.
2.Operations in diverse sectors with strong Order Book position.
3.Qualified and experienced management.
4.Significant experience and track record.
5.Vast Industry knowledge and technical expertise.

Key Risks:

1.The company's revenues are significantly dependent on our PMC business. Any decline in PMC business, could adversely affect the company's business prospects, financial condition and results of operations.
2.Certain board of directors are involved in a number of legal proceedings, which may adversely impact the company's business reputation.
3.There could be cyclical risks associated with this industry.

NBCC IPO Price:

The EPS for the year ended March 31, 2011 is Rs.11.71 and latest EPS is  Rs.15. The book value stands at Rs. 72 and the issue is being offered at 1.5 times the book value. At the higher end of the offer price band of  Rs.90-Rs.106 , the P/E ratio is 7 times, where most of the infra and construction companies are available. Currently, similar companies under the sector are reeling under pressure and going by the current scenario the issue is an above average one. Though the sector offers substantial growth, the company itself growing at 20%, there are concerns and risk factors which could affect the company's earnings. At the indicative offer price, the issue is better for long-term investors only and for traders who want to sell on listing, it could be a tricky one.