Basics of Short Selling: Amid the Hindenburg Report on the Adani Group
Due to the recent confrontation between Adani Group and US short-seller firm Hindenburg Research, short selling or shorting, an advanced stock market trading practice, has been in the spotlight for the past few days.
In a concerning report on Adani Group, Hindenburg claimed to have shorted the company through US-traded bonds and non-Indian-traded derivatives. While the conflict between Hindenburg and Adani escalates, it has also sparked interest in what short selling is.
What is Short Selling?
Short selling is a sophisticated trading technique that is predicated on guesswork, much like betting. Well-researched short positions have a high risk/high reward ratio. The simplest definition of short-selling is predicting a stock’s collapse and then wagering against it.
The sale of a security or share that the seller does not possess is what the Securities and Exchange Board of India (SEBI) describes as short selling. Short selling is the practice of selling borrowed shares in the market to later purchase them at a lower cost.
Is Short Selling a Loss?
Short selling has become increasingly popular over the years as it can offer great potential returns, but it also carries with it a higher level of risk than buying and holding stocks. For this reason, it is important to understand the basics of short selling before attempting to use this strategy.
To short stocks, traders typically sell shares that they have borrowed from a broker-dealer and do not own, opening a position for trading. They short the position by selling it at the going market rate and waiting for prices to decline. Eventually, traders must repurchase the equities they sold short to close their position.
Traders earn from the gap between the selling price and the purchasing price if prices do decline. However, the concerned trader stands to lose if the price decline predicted does not occur and share prices rise instead. In addition to hedging their negative risk from speculating, investors and fund managers utilize short selling to hold long positions in securities or other relevant assets.
Adani Group’s Response
In the case of Hindenburg Research, the short seller claimed that the company maintains short positions in the Adani Group firms using US-traded bonds, non-Indian derivatives, as well as other non-Indian reference securities.
The Adani group claimed that Hindenburg has up to this point actively hidden information regarding its short positions, the source of its funding, the “illegality” underlying the artificial structures by which they hold such positions, or the profit it has made by holding such positions in the group securities.
Adani Group charges Hindenburg with a conflict of interest and notes that the research firm’s report aims to create a phony market and allows the short seller to earn a significant financial gain through unethical techniques at the expense of several investors.
Conclusion
Adani Enterprises begins a $2.45 billion secondary share offering in the middle of this massacre. Adani Green Energy has lost more than 15%, Adani Ports and Special Economic Zone has lost more than 7%, Adani Power has lost over 5%, Adani Total Gas has lost almost 20%, Adani Transmission has lost more than 16%, and Adani Wilmar has also lost over 5% today.
Even Adani’s recent acquisitions are losing money: NDTV is down around 5%, Ambuja Cements is down almost 10%, and ACC is down over 8%.
An extremely complex trading method, short selling generates enormous returns from accurate predictions. If the value of a shorted stock does not decline, it could result in significant losses.
The potential for big gains and little to no initial capital requirements are some benefits of shorting (you borrow the stocks and sell them). The disadvantages, on the other hand, include the possibility of limitless losses, the demand for a margin account, and the obligation to pay margin interest.
