sapm circuit breaker

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Definition of'CircuitBreaker'Refers to any of

the measures usedby stockexchanges during

large sell-offs to

avert panic selling.Sometimes calleda "collar."

Investopedia explains 'Circuit Breaker'After an index has fallen a certain percentage, the exchange might activate trading haor restrictions on program trading. For example, if the Dow Jones Industrial Average

falls by 10%, the NYSE might halt market trading for one hour. There are other circuit

breakers for 20% and 30% falls.

Stock prices of companies listed on the stock exchanges are influenced by several factors - company financials, investor's perception ofthe company's growth, industry trends, government regulations, market speculation, to name a fewSome factors are predictable and can be studied and analysed using statistical tools like graphs a

techniques like ratio analysis, trend analysis, theory of probability etc.

Certain other factors and their influence on prices of a particular stock or the market in general and the degree of their impact are complete

unpredictable.

Since market sentiments cannot be predicted accurately and their impact on stock prices is difficult to judge, sometimes the movement

stock prices can beat all logic and move tremendously in any direction.

Circuit Breaker is a system to sustain sanity of the stock market in such situations. For example, the BSE Sensex moved up by 2110.

points on May 18, 2009 after the Parliament election results were announced. The trading had to be halted since the market becam

extremely volatile and moved beyond reasoning.

What is a circuit?

Circuits are of two types - circuit for an index and for a stock. So, if an index or the price of a stock increases or declines beyond a specifie

threshold it is said to have entered into a circuit. Securities and Exchange Board of India specifies this threshold as a percentage of the pr

day's closing figures.

What is a circuit breaker?

Factors like market speculations force stock prices or indices to enter in a circuit. Such a condition is beyond the control of regulato

authorities. Hence they use the circuit breaker to curb such market situations. Circuit breaker, simply put, is a set of rules formed and issu
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by SEBI in order to bring back normalcy in the stock markets in the event an index or stock enters a circuit. SEBI has different circ

breakers for indices and for stocks.

Circuit breaker for an Index

Circuit breakers are applied only on equity and equity derivative markets. Whenever the major stock indices like BSE Sensex and Nifty cro

the threshold level, SEBI rules require that the trading at the stock exchange be stopped for a certain period of time beginning from half

hour to even an entire day. The time frame for which trading is stopped depends upon the time and amount of movement in the indices. T

idea is to allow the market to cool down and resume trading at normal levels. The thresholds are implemented stage wise.

Movement in Indices Time Close period

10 per cent Before 1.00 pm 1 hour

1.00 pm to 2.30 pm hour

After 2.30 pm Does not close

15 per cent Before 1.00 pm 2 hour

1.00 pm to 2.30 pm 1 hour

After 2.30 pm Close for the rest of the day

20 per cent Any time Close for the rest of the day

Circuit Breaker for a stock

A price band specifies the span or price range for a stock to move without any interference from regulatory authorities. Only when the sto

prices move beyond the range, it is considered as entering into a circuit and circuit breakers are applied. Daily price bands of 2 per cent

per cent and 10 per cent are applicable to different equity stocks. Price bands of 20 per cent are applicable to all remaining scrip l

preference shares or debentures. For example, for a stock with a price band of 5 per cent that closes at Rs100 on the previous day, the pr

band will be between Rs 105 and Rs 95.

What are an Upper circuit and Lower circuit?

Stock prices can either move up or down and hence circuit breakers are required for movements in both directions. An upward moveme

over the threshold will cause a stock to enter an upper circuit. Similarly a downward movement in stock price beyond the threshold will cau

a stock to enter a lower circuit.

The objective of circuit breakers is to control the stock markets at times when they move beyond reasonable limits. When a stock enters

upper circuit, it puts an investor who has already invested in the stock at an advantage. On the contrary a stock movement into a lower circ

places the investor at a disadvantage because it is now difficult to sell off these shares as they have lost a lot of mone

A circuit breaker is a concept whereby trading is halted for a few hours, or inextreme cases, the days trade is suspended for a stock if its price increases

beyond or decreases below a predetermined value that is calculated based on

the previous days closing price

Any stock exchange can moderate trade only during its specified trading hours. The trading hours of worlds largest stock

exchange NYSE is between 9:30 and 16:00 and that of Indias largest (by means ofmarket capitalization),BSEis between

9:15 and 15:30. There are occasions when the market is too turbulent so that the index may climb steeply orfallsharply.
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During these occasions, prices of certain shares may spike or plunge in a single day, neither of which is healthy for trade.

While sharp falls in prices leads to panic selling, high gains can exhaust liquidity and lead to excessive speculations.

A circuit breaker is a concept whereby trading is halted for a few hours, orin extreme cases, the days trade is suspended for

stock if its price increases beyond or decreases below a predetermined value that is calculated based on the previous days

closing price. Circuit breakers are specific to stock exchanges in that the percentage change in value after which it gets

activated varies with stock exchange while some stock exchanges may not even have this concept. For example, BSE has an

upper circuit breaker of 20% and a lower circuit breaker of 10%. If a stock closes at Rs.100 on a day and if the stock reachesRs.120 on the next day, then the circuit breaker becomes active and trading of that stock is halted. Similarly, if the stock falls

Rs.90, again trading is halted.

NSE has more complicated circuit breaker rules, rules that are similar to that of New York Stock Exchange (NYSE). It has thr

circuit breaker limits: 10%, 20% and 30% of the previous days closingstock price. Trade halt duration also depends on the

time of the day when the breach occurs.

For a 10% decline in price before 14:00, the halt will be for an hour and for the same decline between 14:00 and 14:30, the h

will be for half an hour and no halt for 10% decline if it occurs after 14:30. For a 20% decline, halt in trading will be for two

hours if it happens before 13:00, for an hour if it occurs between 13:00 and 14:00 and if it occurs after 14:00, market will be

suspended for the day. In case of a 30% decline, trading will be suspended for the day, whenever the breach may occur.

NYSE first brought out and implemented the concept of circuit breaker after its disastrous experience on October 19, 1987, a

day widely known as the black Monday. On that day, the Dow Jones Industrial Average faced a historic drop in index with

index falling by almost 22%. There was panic selling everywhere and this event became the trigger for a worldwide stock

market crash. The peculiar thing about the incident was that there were no important announcements or news released during

the weekend preceding the day, nothing that can be attributed to have caused the crash. Following this incident, NYSE wante

to keep a check on panic selling and have more control over the market and it subsequently devised the circuit breaker. Its

usage and success enticed other stock exchanges worldwide and was later widely adopted.

The main purpose of circuit breakers is to curb panic selling. Halting operations for a while gives traders time to think over the

options and to reconsider their decision. As a result of circuit breakers, especially to avoid them, traders trade at or slightly

above the lower circuit limit and at slightly below the upper circuit limit. Hence it helps in regulating the prices of shares. For

example, on January 15th 2009, around 190 stocks in BSE were trading at their lower circuit at as early as 12:00 noon as

selling frenzy drove mad the entire market. Had the circuit breaker not been in place, share values wouldve been hit much

more.

Moreover as share markets are rapidly changing day by day, circuit breaker categories and levels too change. This is to cope

up with the changing trader sentiments and better regulation. Separate circuit breaker levels are set for individual stocks and

the overall key index of the stock exchange. For example, apart from day to day fixing of limits for individual stocks, NYSE als

sets limits on its key index Dow Jones Industrial Average for a particular quarter based on its value during the month precedin

the start of that quarter.

Market Analysis - Price

Indices
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SENSEX

19748.19

Day's High

19907.45

Day's Low

19699.76

Previous Close

19804.76

Change

-56.57

% Change

-0.29

Gainers and Losers

Super/Mega Movers

Only Buyers/Sellers

Circuit Breakers Upper/Lower

Value Toppers

New High/Low

Lifetime High/Low

High/Low

Exchange Turnover

Exchange :

Circuit Breaker

( %) :

All

Report

:

Pricewise

Group

:

GO

Upper Circuit Breaker 26-Jul-13 16:00 Hrs IST

Company Name Previous Close

(Rs.)

LTP

(Rs.)

%Change Volume in

(000's)

Value

(Rs. Lakhs)

Dhanus Technology 0.10 0.15 50.00 102.76 0.13

Birla Power Solution 0.20 0.25 25.00 1690.58 3.97

Radaan Mediaworks 0.80 0.90 12.50 3.63 0.03

Sterlite Technologie 20.00 21.30 6.50 582.32 123.23

Action Const. Equip 10.55 11.15 5.69 440.74 47.88

Prajay Engg.Syndicat 6.80 7.15 5.15 62.43 4.32Page 1 of 1 Prev || Next

Lower Circuit Breaker

Company Name Previous Close

(Rs.)

LTP

(Rs.)

%Change Volume in

(000's)

Value

(Rs. Lakhs)

Omnitech Infosolutn 58.00 52.20 -10.00 1.35 0.71

Wockhardt 638.15 574.35 -10.00 1021.22 6104.30

Kolte Patil Develop. 76.10 70.25 -7.69 153.46 108.14

Birla Corporation 233.15 215.60 -7.53 22.39 48.67

Thirumalai Chemicals 93.85 86.85 -7.46 25.41 22.83Aarti Drugs 230.85 213.75 -7.41 11.35 24.81

Nitco 16.90 15.65 -7.40 35.82 5.77

Valecha Engg. 31.95 29.75 -6.89 8.75 2.64

Ruby Mills 165.75 154.45 -6.82 0.79 1.23

Surya Pharmaceutical 0.75 0.70 -6.67 56.78 0.40

Page 1 of 36 Prev || Next

Circuit breakersby J Victor on December 17th, 2011
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Hi there..

As you would have observed , stock prices can move up or down due to a number of reasons. For example

earnings results, government policies, trends in the industry etc. Such prices movements are reasonable an

logical.

But in some cases, stock prices may move up or down drastically, accelerated mostly due to fear or greed b

speculators and manipulators. Such movements are harmful for the stock markets.

In order to control such heavy price fluctuations, stock exchanges have a system called circuit breakers

something that works similar to the electricity circuit breakers that we have at hom

Circuit breakers were first introduced in the trading system of Indian stock exchanges back in 1992 at th

BSE. There are separate circuit breakers for the indices and individual stocks.

These control systems ensure sanity of the stock market and protects investors. These are also called circu

limits or price bands.

HOW DOES IT WORK?

When the volatility of a stock breaks a certain limit as decided by the exchange, trading in that stock

stopped for some time. The limit is fixed as a percentage of the stocks price by the stock exchange. The rule

for circuit breaking are decided by the Securities exchange Board.

For example if the regulators decide that the circuit limit for a stock is 15%, then, trading in that stock will b

halted for the day, if the stock price moves up or down 15% in one day.

CIRCUIT LIMITS FOR SENSEX AND NIFTYThere are 3 circuit limits for indices 10%, 15% and 20%.Circuit filter is applied to Sensex or Nifty whichev

is breached first. The trigger of circuit limits also depends on the time at which it occurs.

10% movement in either direction

If the movement is before 1 pm 1 hour halt

If the movement is after 1 but before 2:30 pm half an hour halt

If the movement is after 2.30 pm no halt


After the above mentioned halts, trading starts again. If the market hits 10% again, there will not be any halt

but if it breaches 15%, circuit limits comes to play again.If the movement is before 1 pm 2 hours halt

If the movement is after 1 pm but before 2 pm- 1 hour halt

I the movement is after 2 pm no further halt.


On resumption, if the market hits 20%, trading will be halted for the day.

The above percentage is calculated on the closing value of the Sensex or the Nifty on the last day of th

immediate preceding quarter. So, for deciding the circuit limit for the Jan-march 2011 period, the closing valu

of the bellwether indices on December 31, 2010 would be used.

WHAT HAPPENS TO ORDERS DURING CIRCUIT LIMITS?
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If the market hits the upper or lower circuits, trading is halted and you cannot place orders until the market r

opens

If you have pending orders with the broker at the time of circuit break, such orders can be modified

cancelled only once the trading re-opens.

CIRCUIT LIMITS FOR INDIVIDUAL STOCKS.

Stock specific circuit filters are applied in both BSE and NSE index; the percentage for circuit filter limit is 2%

5%, 10%, 20%. Not all stocks fall in the circuit limit category. There are stocks to which circuit limits are n

applicable.For newly listed companies, there is a circuit limit of 20% from the issue price.

Circuit breaker:

Stock exchange is marked by changes in the stock value frequently. There are steps taken by people take action against the falling value of the assets. They try to stop trading for a short period on temporarily basis when they find that the market value has been depreciated. This is mainly targeted preventing the fall in market value by allowing the selling and buying of orders thereby maintaining

balance.

The stock exchanges generally wish to reduce the damages caused due to the falling of a price of assetThey then plan to regulate the stock exchange by defensive methods. A falling of price can lead todangerous situation where the panic selling can rise up. Circuit breaking will permit them to stotrading in the market for that period. This allows them to limit things from going beyond their scope.

Thus circuit breaking is initiated by stock market when they expect something catastrophic to happen the stock market. A lot of investors can plan to dump their securities because of a fear of depression ithestock market. This situation can be handled only through a circuit breaking mechanism.

Circuit breaking can be handled with care. The halting of trade need to be done by lowering down thprice. With the help of this, the commodity exchanges can happen thereby creating a healthier situatioand thus preventing things from going out of control. This strategy of stopping trade is a newapproach. Different steps were taken and these were agreed upon by the stock markets all over thworld.

The steps are taken by lowering the market activities. The action taken by companies might be for falof ten or twenty or thirty based on a firm. The average of lowering is monitored by evaluating the statof Dow Jones International average.

Circuit breaker has proved to be an effective step in taking actions in preventing heavy fall in market. critical situation is handled in an effective manner. The steps need to be taken by efficiently monitorinthe status of the market value.

Carry forward:

Carry forward are usually related to the firms that have cyclic working such as transportation. This often referred to as tax loss. This is the operating loss in a business. This can be claimed after a fixenumber of years in a future period. A loss in the current year will be carry forward to a later period infuture year and this can be used to offset profit.
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There are no limits set on the capital loss that can be used to offset profit in a year for carry forwarThe losses that are in excess of gains only will be used to offset income. This is also referred to as carover. Carry forward is a term used to apply to personal pensions. This takes into consideration the tarules. This means that the individual can make contributions apart from the taxes of the current tayear. Before applying the carry forward, the contributions for the current year has to be paid in full.

If an account has a year end balance and that is positive, the amount will be automatically carrforwarded to the nest fiscal year. The budget will be appropriated before the calculations for the nex

fiscal year is made. Carry forward has several rules that need to be documented and is dependent on thplace where it is going to be executed. The rules need to be followed in connection to the carry forwaof surplus or deficit in a budget.

The carry forward needs to be executed in connection to the department where it is applicable. Theare university rules concerning the carry forward in specific departments in carry forward. There can bspecial rules as to how the budget needs to be carry forwarded to the next fiscal year. The balance cabe adjusted to be used for the next fiscal year and this requires that the rules are strictly followed. Thhas to be properly documented and submitted to the concerned authority to make thruleanalysisproper.

Carry forward is yet another jargon used in stock market. That in connection to the working of carforward has to understand the term properly. This is because; the calculation might be simple but usewill have to understand each aspect of the term in order to make the gains cross the loss.

Understand Stock Exchange Circuit BreakersJune 06 , 2012

Free markets work on the ideal of price discovery. Share prices reflect not only a company's performance but also investoviews and expectations about it. While performance is measurable and can be forecasted with reasonable accuracy, peoplesentiments is hard to predict and at times cannot be justified by reason. Therefore market regulator SEBI has put in placemechanism to ensure that in a trading session prices don't move beyond what can be said to be supported by logical reason.

What are circuit breakers?

Circuit breaker is a measure enforced by stock exchanges to restrict trades of a share or index when there is tremendouslarge price movement in a single trading day. Circuit breakers work at index level and individual share level. Trigger price leveand trade halt time are prescribed by SEBI and are followed on the NSE and BSE.

In India a tremendous fall or even rise in price can trigger circuit breakers. In many countries only a fall activates circuit filtCircuit breakers are in place for all securities. Circuit breaker that gets triggered when price has risen is called an upper circand circuit breaker that gets triggered when price has fallen is called a lower circuit.

How do circuit breakers work?

Like circuit breakers in some electronic devices that block unwanted frequencies, circuit breakers stop prices from moving vesteeply in any direction in a short span of time. When price of a share or index leaps and touches a prescribed level, circbreaker is automatically triggered. This halts trading of the share or all shares on the index for a set time.

1. Index level circuit breaker

On the index level circuit breakers are applicable to both cash trades and derivative trades of equity shares. Since somshares are common on both Sensex and Nifty there is a market wide circuit breaker which gets triggered in whichever indecrosses the price level first. There are three levels of prices at which circuit breaker would get activated. The prices acalculated with index value as on last trading session of the previous quarter as base.

Level 1 circuit breaker- 10% movement in either index
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If breached before 1 pm there would be a trading halt of 1 hour.

If breached between 1 pm and 2.30 pm there would be a trading break of half an hour.

If breached after 2.30 pm there would be no trading halt.


If breached before 1 pm there would be a trading halt of 2 hours.

If breached between 1 pm and 2.30 pm there would be a trading halt of 1 hour.

If breached after 2.30 pm trading would be halted for the rest of the day.


If any of the indices cross 20% of the price as on previous quarter's last trading day at any time trading will be stoppedon that index for the rest of the day.

2. Individual security level price filter

Price filter does not apply for stocks on which derivatives are available or those stocks on indices like sensex and nifty whihave derivative products.

On all other securities a 20% filter is applicable. In addition stocks exchanges may have filters at 2%, 5% and 10% level. Circ

breakers for individual securities are displayed on BSE and NSE website.

Why are circuit breakers in place?

When prices rise or fall freakily it could be as a reaction to some sensitive news or incorrect punching by a broking staff or eva technical glitch on the exchange's network. Extreme volatility is most damaging to retail investors than other big investors. whenever there is abnormal rise or fall in prices investors need to be given time to recollect and evaluate what is causing tsteep price movement and react with sanity. Otherwise fear and panic can cause slaughter on the markets.

From past instances where markets were halted it has been observed trading resumed to normal when markets resumed frothe halt. Some might recall the recent freak trade by a staff at Emkay Global in October 2012 who placed erroneous orders thsaw Nifty fall by 15.5% and triggered the market wide circuit breaker. As soon as markets resumed after the halt tradebecame normal. In the absence of such measures retail investors could be big victims.

Stop loss orders

A way to protect your capital


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What is meant by 'Stoploss'?Stoploss is a buy or sell order which gets triggered automatically, once the stock reaches a certain price. The aim here is to limit

the loss on a security (buy or sell) position. A stop order to sell becomes a market order when the item is offered at or below the specified

price. E.g.: If you have bought 1 share of RIL at Rs. 1,050, you will enter stoploss order at a price below Rs. 1,050, say Rs. 1,020. If RIL

share price falls to Rs. 1,020, a sell stoploss order will get triggered, which limits your loss on account of purchase to Rs. 30.

Similarly, a stop order to buy becomes a market order when the item is bid at or above the specified price. E.g.: If you have short-

sold 1 share of RIL at Rs. 1,050, you will enter stoploss order at a price above Rs. 1,050, say Rs. 1,070. If RIL share price rises to Rs. 1,070

a buy stoploss order will get triggered, which will limit your loss on account of sale to Rs. 20.

There are no set rules for stoploss orders. Traders deploy very tight stoploss orders, while investors may not need it also.

Advantage of stoploss is it avoids the need for constant monitoring of share price. Its disadvantage is that short-term price fluctuations coul

trigger stoploss orders very frequently. Also, setting very narrow stoploss for shares historically having wide price fluctuations could lead to

unnecessary triggers of stoploss. E.g.: If you bought 1 share of RIL at Rs. 1050 with stoploss of Rs. 1020. This means that if the stock falls

below 1020, your stoploss order will automatically become a market order and share will be sold at the then prevailing market price, not

necessarily the stoploss price. Thus setting a stoploss order below the purchase price will limit the loss, but in a very fast-moving market,

losses may be higher than expected. It is an order placed with a broker to buy or sell once the stock reaches a certain price. A stop loss ord

works like this: You tell your broker you want a stop loss order at a certain price on the stock. When, and if, the stock hits that price, your st

loss order becomes a market order, which means your broker sells the stock at the best market price available immediately.

The main advantage of a stop loss market order is that it costs nothing to implement. Your regular commission is charged only on

the stop-loss price has been reached and the stock must be sold. You can think of it as a free insurance policy. Most importantly, a stop lo

allows decision making to be free from any emotional influences. People tend to fall in love with stocks, believing that if they give a sto

another chance, it will come around. This causes procrastination and delay, giving the stock yet another chance. In the meantime, the loss

may mount wiping out a substantial figure. Here is an important point to remember: Be careful where you set your stop loss . If a sto

normally fluctuates Rs 10-15, you shouldnt set your stop loss too close to that range or it will sell the stock on a normal downswing.

TRAILING STOPS

Another use of this tool is to lock in profits, in which case it is sometimes referred to as a trailing stop. A trailing stop loss is fixed at a certa

percentage below the current market price of the stock you own. The trailing stop loss percentage depends on how volatile the stock is. If tstock begins to go down and the trailing stop loss gets triggered, you would be able to book your profits in the deal. However, if the sto

goes up, you will be bringing the trailing stop loss up to maximize your profits.

For example you bought shares in , say , Reliance for Rs 1000. The Current market price of the share is Rs 1100 .So you set the trail

stop at, say Rs 1070 so that in the event of stock price crash, your sell is at Rs 1070 booking a profit of Rs 70 per share . Now instead

stock prices coming down, suppose it went up to Rs 1200 .now, you may want to fix the trailing stop at 1160, locking a profit of Rs 160 p

share.

VERY USEFUL FOR DERIVATIVE TRADERS

Big bucks are at stake when you enter futures and options. Stop loss orders are particularly useful for traders of derivatives.

MARKET ORDERS AND LIMIT ORDERS

The stop loss order can be stop loss market orders or stop loss limit orders. The difference is that A stop loss limit order is an order to buy

security at no more (or sell at no less) than a specified limit price. This gives the trader some control over the price at which the trade

executed. In a stop loss market order, the trader has no control over the price at which the transaction is executed.

PROS AND CONS

The other positive factor of stop loss orders is that you dont have to monitor on a daily basis how a stock is performing. This is especially i

situation that prevents you from watching your stocks for an extended period of time.

The disadvantage is that the stop price could be activated by a short- term fluctuation in a stocks price. The key is picking a stop -lo

percentage that allows a stock to fluctuate day to day while preventing as much downside risk as possible.


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Buying & Selling sharesby J Victor on June 24th, 2011

Buying and selling shares is an easy process with fast online terminals. There are different types of Buy & s

orders you can place in the market. Although its an easy process, carelessness in executing can result

financial loss. Heres a brief explanation of each type of order and its benefits.

TYPES OF ORDERS

LIMIT ORDERS

Type of orders where you specify the price while entering the order into the system. You have to select thappropriate option to notify whether you are placing the order at Market or at Limit. If you select the Lim

order option then you have to enter a price that is in multiple of regular tick size (multiples of 0.05).

MARKET ORDERS

when you place an order without a limit price with an intention to get it executed at the best price obtainable

the time of entering the order, its called a Market order.

STOP LOSS ORDERS

when you place an order with a trigger price its called a stop loss order.. Till the trigger price spe cified in t

order is reached or surpassed such orders are kept dormant. The intention for placing a Stop Loss order is

restrict the maximum loss in a particular position to a predetermined amount.Stop Loss orders are always placed in pairs. The first order has to be a normal order either limit order

market order. The second order will be a stop loss order that will ensure that maximum loss is restricted.

The benefit of stop loss orders:

If you place a buy order at Rs100 and do not wish to take a loss of more than Rs2 then you will want to sell

Rs98, when the market starts sliding contrary to your expectations. You can obviously keep a watch on th

market and sell when it slides and exit your position at Rs98. But this may not always be possible. By enterin

a Stop Loss order you achieve the same objective without a need to keep a watch on the market.If you place

sell order when the price is above Rs98, your order will get immediately executed. If you place a stop los

order for Rs98 then this order will remain dormant till market prices breach the trigger price.


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In the current example you will place a Stop Loss order for Rs98 with a trigger price of Rs98.10. You can als

place a Stop loss order at Market with a trigger price of Rs98.10. In this case when stop loss is triggered th

shares will be sold at market rate.

Most users make a mistake of placing a stop loss order without the original order. Users typically mistake th

limit price to be the main order and trigger price to be stop loss order. Thus in the above example many use

intending to limit the loss to Rs2 will place only one order at a limit price of Rs100 and a trigger price of Rs9

You should have a clear understanding of how stop loss orders are to be placed before placing such orders.

IOC ORDERSHere you place an order with an IOC instruction i.e. with an intention to get it executed immediately, failin

which the order is cancelled. It is possible that the order gets partially traded, and in such cases the remainin

portion of the order is cancelled immediately. Stop loss orders cannot be placed as IOC orders. You can plac

a normal order (at limit or market) as an IOC order.

Take Note

You must fill the Quantity text box correctly before placing the order. Quantity has to be in multiple of lot siz

In cash market most of the shares have a lot size of 1. In Derivatives lot sizes vary from scrip to scrip. In mo

of the trading platforms, Quantity field cannot be directly entered in the Derivatives OE window. You have

click on the up/down control next to the Quantity text box and the quantity will increment/ decrement by l

size.

Disclosed Quantity

You can leave the Disclosed Quantity (DQ) text box blank. In case you fill it, it has to be at least 10% of th

order quantity. An order with a DQ condition allows you to disclose only a part of the order quantity to th

market. For example, an order of 1000 with a DQ condition of 200 will mean that 200 is displayed to th

market at a time. After this is traded, another 200 is automatically released and so on till the order is execute

fully.

PLACING ORDERS TO BUY AND SELL

Once you are sure you entered all the information correctly (quantity and the type of order) you can click o

the Place button. This will create an Order packet and display it to you. You have to confirm that the packet

generated correctly by clicking on the Confirm button. After your confirmation, the order will be sent into th

market. Each order packet that is created at your end is uniquely numbered (Local Order ID) and tim

stamped before being sent to the broker.

As soon as the order is received at the brokers server an acknowledgment is sent back. It is then given

unique Broker Order ID, time-stamped and sent for checking the limits. Once the broker confirms that th

order is within your financial limits, it is put in queue for sending to Exchange and you will be notified of th

same. When the order is sent to Exchange, another notification will be sent to you.

When orders are received by Exchange they are numbered (Exchange Order ID) and time-stamped aga

Exchange may either accept the order or may reject it due to errors in the order or due to price out of dayprice range or any other reason. It may also freeze your order and may release the freeze later. Whether th

order is accepted, rejected or frozen by the Exchange will be notified to you.

MODIFYING A BUY/SELL ORDER

You can modify an online order to buy or sell a share once your original order it is accepted by the Exchange

You cannot modify or cancel an order after it has got executed. Obviously the application has in bu

safeguards and will not allow you to modify or cancel an order unless it can be done. However, there is a ga

between the time when you picked an order to be modified/ cancelled and the time when it was received at th

Exchange, and it is quite possible that the order changes status during that time. A pending order might g

executed during that gap. You may therefore get a message saying Order does not exist. This means that torder that you tried to modify or cancel was not found by the Exchange in its Order Book at that time.


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CONFIRMATION OF A TRADE

Confirmation messages for Order and Trade related actions will be displayed in the Messages Panel instantl

Generally, you will get confirmation messages for

Orders sent to the broker

Orders received by the broker

Orders accepted or rejected by the broker

Orders put in queue to Exchange

Orders sent to ExchangeOrders accepted, rejected or frozen by the Exchange

Trade confirmations sent by the Exchange

All these messages will display the time and associated order IDs Local Order ID, Broker Order ID an

Exchange Order ID.


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Margin Trading: IntroductionImagine this: you're sitting at the blackjack table and the dealer throws you an ace. You'd love to increase your bet, but you're a little shorton cash. Luckily, your friend offers to spot you $50 and says you can pay him back later. Tempting, isn't it? If the cards are dealt right, yocan win big and pay your buddy back his $50 with profits to spare. But what if you lose? Not only will you be down your original bet, butyou'll still owe your friend $50. Borrowing money at the casino is like gambling on steroids: the stakes are high and your potential for prois dramatically increased. Conversely, your risk is also increased.Investing onmarginisn't necessarily gambling. But you can draw some parallels between margin trading and the casino. Margin is a highrisk strategy that can yield a huge profit if executed correctly. The dark side of margin is that you can lose your shirt and any other assetsyou're wearing. One of the only things riskier than investing on margin is investing on margin without understanding what you're doing.This tutorial will teach you what you need to know.

Margin buying

Margin buying refers to the buying of securities with cash borrowed from a broker, using other securities as collateral. This

has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net

valuethe difference between the value of the securities and the loanis initially equal to the amount of one's own cash

used. This difference has to stay above aminimum margin requirement, the purpose of which is to protect the broker

against a fall in the value of the securities to the point that the investor can no longer cover the loan.

In the 1920s, margin requirements were loose. In other words, brokers required investors to put in very little of their own

money. Whereas today, theFederal Reserve's margin requirement (underRegulation T) limits debt to 50 percent, during th

1920sleverage ratesof up to 90 percent debt were not uncommon.When thestock marketstarted to contract, many

individuals receivedmargin calls. They had to deliver more money to their brokers or their shares would be sold. Since man

individuals did not have the equity to cover their margin positions, their shares were sold, causing further market declinesand further margin calls. This was one of the major contributing factors which led to theStock Market Crash of 1929, which

turn contributed to theGreat Depression.However, as reported in Peter Rappoport and Eugene N. White's 1994 paper

published inThe American Economic Review,"Was the Crash of 1929 Expected",all sources indicate that beginning in eith

late 1928 or early 1929, "margin requirements began to rise to historic new levels. The typical peak rates on brokers' loans

were 4050 percent. Brokerage houses followed suit and demanded higher margin from investors".

Examples

Jane buys a share in a company for $100, using $20 of her own money, and $80 borrowed from her broker. The net value (share - loan) is

$20. The broker wants a minimum margin requirement of $10.

Suppose the share goes down to $85. The net value is now only $5 (net value ($20) - share loss of ($15)), and Jane will either have to sell

the share or repay part of the loan (so that the net value of her position is again above $10).

Types of margin requirements

The current liquidating margin is the value of a securities position if the position were liquidated now. In other words, if the

holder has ashort position, this is the money needed to buy back; if they arelong, it is the money they can raise by selling it.

The variation margin ormaintenance margin is not collateral, but a daily payment of profits and losses. Futures aremarke

to-marketevery day, so the current price is compared to the previous day's price. The profit or loss on the day of a position is

then paid to or debited from the holder by the futures exchange. This is possible, because the exchange is the central

counterparty to all contracts, and the number of long contracts equals the number of short contracts. Certain other exchange

traded derivatives, such as options on futures contracts, are marked-to-market in the same way.

The seller of an option has the obligation to deliver the underlying of the option if it is exercised. To ensure they can fulfill this

obligation, they have to deposit collateral. This premium margin is equal to the premium that they would need to pay to buy

back the option and close out their position.

Additional margin is intended to cover a potential fall in the value of the position on the following trading day. This is

calculated as the potential loss in a worst-case scenario.
http://www.investopedia.com/terms/m/margin.asphttp://www.investopedia.com/terms/m/margin.asphttp://www.investopedia.com/terms/m/margin.asphttp://en.wikipedia.org/wiki/Securities_lendinghttp://en.wikipedia.org/wiki/Securities_lendinghttp://en.wikipedia.org/wiki/Securities_lendinghttp://en.wikipedia.org/wiki/Federal_Reserve_Systemhttp://en.wikipedia.org/wiki/Federal_Reserve_Systemhttp://en.wikipedia.org/wiki/Federal_Reserve_Systemhttp://en.wikipedia.org/wiki/Regulation_Thttp://en.wikipedia.org/wiki/Regulation_Thttp://en.wikipedia.org/wiki/Regulation_Thttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Margin_callhttp://en.wikipedia.org/wiki/Margin_callhttp://en.wikipedia.org/wiki/Margin_callhttp://en.wikipedia.org/wiki/Wall_Street_Crash_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_1929http://en.wikipedia.org/wiki/Wall_Street_Crash_1929http://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/The_American_Economic_Reviewhttp://en.wikipedia.org/wiki/The_American_Economic_Reviewhttp://en.wikipedia.org/wiki/The_American_Economic_Reviewhttp://www.jstor.org/stable/2117982http://www.jstor.org/stable/2117982http://www.jstor.org/stable/2117982http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Mark_to_markethttp://en.wikipedia.org/wiki/Mark_to_markethttp://en.wikipedia.org/wiki/Mark_to_markethttp://en.wikipedia.org/wiki/Mark_to_markethttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Mark_to_markethttp://en.wikipedia.org/wiki/Mark_to_markethttp://en.wikipedia.org/wiki/Long_(finance)http://en.wikipedia.org/wiki/Short_(finance)http://www.jstor.org/stable/2117982http://en.wikipedia.org/wiki/The_American_Economic_Reviewhttp://en.wikipedia.org/wiki/Great_Depressionhttp://en.wikipedia.org/wiki/Wall_Street_Crash_1929http://en.wikipedia.org/wiki/Margin_callhttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Leverage_(finance)http://en.wikipedia.org/wiki/Regulation_Thttp://en.wikipedia.org/wiki/Federal_Reserve_Systemhttp://en.wikipedia.org/wiki/Securities_lendinghttp://www.investopedia.com/terms/m/margin.asp


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SMAandportfolio marginsoffer alternative rules for U.S. andNYSEregulatory margin requirements.[clarification needed]

Enhanced leverage is a strategy offered by some brokers that provides 4:1 or 6:1+ leverage. This requires maintaining two

sets of accounts, long and short.

Example 1

An investor sells acall option, where the buyer has the right to buy 100 shares in Universal Widgets S.A. at 90. He receives an option

premium of 14. The value of the option is 14, so this is the premium margin. The exchange has calculated, using historical prices, that t

option value will not exceed 17 the next day, with 99% certainty. Therefore, the additional margin requirement is set at 3, and the

investor has to post at least14 + 3 = 17 in his margin account as collateral.

Example 2

Futures contracts onsweet crude oilclosed the day at $65. The exchange sets the additional margin requirement at $2, which the holder of

long position pays as collateral in her margin account. A day later, the futures close at $66. The exchange now pays the profit of $1 in the

mark-to-market to the holder. The margin account still holds only the $2.

Example 3

An investor is long 50 shares in Universal Widgets Ltd, trading at 120 pence (1.20) each. The broker sets an additional marg in requireme

of 20 pence per share, so 10 for the total position. The current liquidating margin is currently 60 "in favour of the investor". The

minimum margin requirement is now -60 + 10 = -50. In other words, the investor can run a deficit of 50 in his margin account and stfulfil his margin obligations. This is the same as saying he can borrow up to 50 from the broker.

Initial and maintenance margin requirements

The initial margin requirement is the amount required to be collateralized in order to open a position. Thereafter, the amoun

required to be kept in collateral until the position is closed is the maintenance requirement. The maintenance requirement is

the minimum amount to be collateralized in order to keep an open position. It is generally lower than the initial requirement.

This allows the price to move against the margin without forcing a margin call immediately after the initial transaction. On

instruments determined to be especially risky, however, the regulators, the exchange, or the broker may set the maintenance

requirement higher than normal or equal to the initial requirement to reduce their exposure to the risk accepted by the trader.

Margin call

When the margin posted in the margin account is below the minimum margin requirement, the broker or exchange issues

a margin call. The investors now either have to increase the margin that they have deposited or close out their position. The

can do this by selling the securities, options or futures if they are long and by buying them back if they are short. But if they do

none of these, then the broker can sell their securities to meet the margin call. If a margin call occurs unexpectedly, it can

cause adomino effectof selling which will lead to other margin calls and so forth, effectively crashing an asset class or group

of asset classes.

This situation most frequently happens as a result of an adverse change in the market value of the leveraged asset or contrac

It could also happen when the margin requirement is raised, either due to increased volatility or due to legislation. In extreme

cases, certain securities may cease to qualify for margin trading; in such a case, the brokerage will require the trader to eithe

fully fund their position, or to liquidate it.[3]

Price of stock for margin calls

The minimum margin requirement, sometimes called the maintenance margin requirement, is the ratio set for:

(Stock Equity - Leveraged Dollars) to Stock Equity

Stock Equity being the stock price * no. of stocks bought and leveraged dollars being the amount borrowed in the margin accoun

E.g., An investor bought 1,000 shares of ABC company each priced at $50. If the initial margin requirement were 60%:

Stock Equity: $50 * 1,000 = $50,000

Leveraged Dollars or amount borrowed: ($50 * 1,000)* (100%-60%) = $20,000
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So the maintenance margin requirement uses the variables above to form a ratio that investors have to abide by in order to keep the accoun

active.

The point is, let's say the maintenance margin requirement is 25%. That means the customer has to maintain Net Value equal to 25% of th

total stock equity. That means they have to maintain net equity of $50,000 * 0.25 = $12,500. So at what price would the investor be gettin

a margin call? Let P be the price, so 1000P in our case is the Stock Equity.

(Current Market Value - Amount Borrowed) / Current Market Value = 25%

(1000P - 20000)/1000P = 0.25

(1000P - 20000)= 250P

750P = $20,000

P = $20,000/750 = $26.66 / share

So if the stock price drops from $50 to $26.66, investors will be called to add additional funds to the account to make up for the loss in

stock equity.

An alternative formula for calculating P is P=P_0((1-initial margin requirement)/(1-maintenance margin requirement)) where P_0 is the

initial price of the stock. Let's use the same information to demonstrate this:

P=$50*((1-.6)/(1-.25))

P=$26.66

Reduced margins

Margin requirements are reduced for positions that offset each other. For instancespread traderswho have offsetting futures contracts do

not have to deposit collateral both for their short position and their long position. The exchange calculates the loss in a worst case scenario

of the total position. Similarly an investor who creates acollarhas reducedrisk since any loss on the call is offset by a gain in the stock, a

a large loss in the stock is offset by a gain on the put; in general, covered calls have less strict requirements than naked call writing.

Margin-equity ratio

The margin-equity ratio is a term used byspeculators, representing the amount of their trading capital that is being held as margin at any

particular time. Traders would rarely (and unadvisedly) hold 100% of their capital as margin. The probability of losing their entire capital

some point would be high. By contrast, if the margin-equity ratio is so low as to make the trader's capital equal to the value of the futurescontract itself, then they would not profit from the inherentleverageimplicit in futures trading. A conservative trader might hold a margin

equity ratio of 15%, while a more aggressive trader might hold 40%.

Return on margin

Return on margin (ROM) is often used to judge performance because it represents the net gain or net loss compared to the exchange's

perceived risk as reflected in required margin. ROM may be calculated (realized return) / (initial margin). The annualized ROM is equal t

(ROM + 1)(1/trade duration in years) - 1

For example if a trader earns 10% on margin in two months, that would be about 77% annualized

Annualized ROM = (ROM +1)1/(2/12) - 1

that is, Annualized ROM = 1.16 - 1 = 77%

Sometimes, return on margin will also take into account peripheral charges such as brokerage fees and interest paid on the sum borrowed.

The margin interest rate is usually based on thebroker's call.
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Short Selling: Introduction

Filed Under Beginning InvestorShort Selling, Short Selling,Beginning Investor

What is Short Selling and Securities Lending & Borrowing?Short Selling means selling of a stock that the seller does not own at the time of trade. Short selling can be

done by borrowing the stock through Clearing Corporation/Clearing House of a stock exchange which is

registered as Approved Intermediaries (AIs). Short selling can be done by retail as well as institutional

investors. Naked short sale is not permitted in India, all short sales must result in delivery, and information on

short sale has to be disclosed to the exchange by end of day by retail investors, and at the time of trade for

institutional investors. The Securities Lending and Borrowing mechanism allows short sellers to borrow

securities for making delivery. Securities in the F&O segment are eligible for short selling.

Securities Lending and Borrowing (SLB) is a scheme that has been launched to enable settlement of

securities sold short. SLB enables lending of idle securities by the investors through the clearing

corporation/clearing house of stock exchanges to earn a return through the same. For securities lending and

borrowing system, clearing corporations/clearing house of the stock exchange would be the nodal agency an

would be registered as the "Approved Intermediaries"(AIs) under the Securities Lending Scheme, 1997.

Under SLB, securities can be borrowed for a period of 7 days through a screen based order matching

mechanism. Securities in the F&O segment are eligible for SLB.

Have you ever been absolutely sure that a stock was going to decline and wanted to profit from its regrettabl

demise? Have you ever wished that you could see your portfolio increase in value during a bear market? Both

scenarios are possible. Many investors make money on a decline in an individual stock or during a bear

market, thanks to an investing technique calledshort selling. (For related reading, seeWhen To Short A

Stock.)

Short selling is not complex, but it's a concept that many investors have trouble understanding. In general,

people think of investing as buying an asset, holding it while it appreciates in value, and then eventually sellin

to make a profit. Shorting is the opposite: an investor makes money only when a shorted security falls in

value.

Short selling involves many unique risks and pitfalls to be wary of. The mechanics of a short sale are relative

complicated compared to a normal transaction. As always, the investor faces high risks for potentially high

returns. It's essential that you understand how the whole process works before you get involved.

Short Selling: What Is Short Selling?


First, let's describe what short selling means when you purchase shares of stock. In purchasing stocks, youbuy a piece of ownership in the company. The buying and selling of stocks can occur with a stock broker or
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directly from the company. Brokers are most commonly used. They serve as an intermediary between the

investor and the seller and often charge a fee for their services.

{C}When using a broker, you will need to set up an account. The account that's set up is either a cash accou

or amargin account. A cash account requires that you pay for your stock when you make the purchase, but

with a margin account the broker lends you a portion of the funds at the time of purchase and the security

acts as collateral.

When an investor goeslongon an investment, it means that he or she has bought a stock believing its price

will rise in the future. Conversely, when an investor goesshort, he or she is anticipating a decrease in share

price.

Short selling is the selling of a stock that the seller doesn't own. More specifically, a short sale is the sale of a

security that isn't owned by the seller, but that is promised to be delivered. That may sound confusing, but it'

actually a simple concept. (To learn more, readBenefit From Borrowed Securities.)

Still with us? Here's the skinny: when you short sell a stock, yourbrokerwill lend it to you. The stock will

come from the brokerage's own inventory, from another one of the firm's customers, or from another

brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must

"close" the short by buying back the same number of shares (calledcovering) and returning them to your

broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference.

the price of the stock rises, you have to buy it back at the higher price, and you lose money.

Most of the time, you can hold a short for as long as you want, although interest is charged on margin

accounts, so keeping a short sale open for a long time will cost more However, you can be forced to cover if

the lender wants the stock you borrowed back. Brokerages can't sell what they don't have, so yours will eithe

have to come up with new shares to borrow, or you'll have to cover. This is known as beingcalled away. It

doesn't happen often, but is possible if many investors are short selling a particular security.

Because you don't own the stock you're short selling (you borrowed and then sold it), you must pay the lende

of the stock anydividendsorrightsdeclared during the course of the loan. If the stocksplitsduring the cours

of your short, you'll owe twice the number of shares at half the price. (To learn more about stock splits,

readUnderstanding Stock Splits.)

Short Selling: Why Short?


ByBrigitte Yuille

Generally, the two main reasons to short are to either speculate or to hedge.

Speculate

When youspeculate, you are watching for fluctuations in the market in order to quickly make a big profit off o
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a high-risk investment. Speculation has been perceived negatively because it has been likened to gambling.

However, speculation involves a calculated assessment of the markets and taking risks where the odds appea

to be in your favor. Speculating differs from hedging because speculators deliberately assume risk, whereas

hedgers seek to mitigate or reduce it. (For more insight, seeWhat is the difference between hedging and

speculation?)

Speculators can assume a high loss if they use the wrong strategies at the wrong time, but they can also see

high rewards. Probably the most famous example of this was whenGeorge Soros"broke the Bank of England

in 1992. He risked $10 billion that the British pound would fall and he was right. The following night, Soros

made $1 billion from the trade. His profit eventually reached almost $2 billion.(For more on this trade, seeTh

Greatest Currency Trades Ever Made.)

Speculators can benefit the market because they increase trading volume, assume risk and add market

liquidity. However, high amounts of speculative purchases can contribute to an economic bubble and/or a

stock market crash.

Hedge

For reasons we'll discuss later, very few sophisticated money managers short as an active investing strategy

(unlike Soros). The majority of investors use shorts tohedge. This means they are protecting other long

positions with offsetting short positions.

Hedging can be a benefit because you're insuring your stock against risk, but it can also be expensive and

abasis riskcan occur. (To learn more about hedging, readA Beginner's Guide To Hedging.)

Restrictions

Many restrictions have been placed on the size, price and types of stocks traders are able to short sell. For

example,penny stockscannot be sold short, and most short sales need to be done inround lots. The

Securities Exchange Commission (SEC) has these restrictions in place to prevent the manipulation of stock

prices.

As of January 2005, short sellers were also required to comply with the rules set in place by "Regulation SHO

which modernized the rules overseeing short selling and aimed to provide safeguards against "naked short

selling." For instance, sellers had needed to show that they could locate and get the securities they intended t

short. The regulation also created a list of securities showing a high level of persistent sales to deliver.

In July of 2007, the SEC eliminated theuptick, or zero plus tick, rule. This rule required that every short sale

transaction be entered at a higher price than that of the previous trade and kept short sellers from adding to

the downward momentum of an asset when it was already experiencing sharp declines. The rule has been

around since the creation of the SEC in 1934. One of the reasons it was put in place was to slow rapid and

sudden declines in share prices that can occur as a result of short selling.
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In July of 2008, the SEC used its emergency powers to put an end to market manipulations, such as spreadin

negative rumors about a company's performance and sharp price declines. The markets had been volatile as

result of the of mortgage and credit crisis, and the SEC wanted to establish a renewed confidence. For a

month, it didn't allownaked short sellingon the stocks of 19 major investment and commercial banks, which

included the mortgage finance companies Fannie Mae and Freddie Mac. (To learn more, read The Uptick Rule

Does It Keep Bear Markets Ticking?)

The SEC took further measures in September of 2008, once again using its emergency authority to issue six

orders to minimize abuses. This included a move to halt short selling in shares of 799 companies in

cooperation with the United Kingdom's Financial Service Authority. 170 companies were later included in the

ban, which ended after the passage of the $700 billion U.S. bailout plan in October 2008. Another order

required short sellers get a sale and immediately close it by making sure the shares were delivered. It later

became a rule.

Who Shorts?

Some insiders indicate that it takes a certain type of person to short stocks.

Many short sellers have been depicted as pessimists who are rooting for a company's failure, but they've also

been described as disciplined and confident in their judgment. (To learn more, readQuestioning The Virtue Of

Short Sale.)

Sellers are typically:

wealthy sophisticated investors

hedge funds

large institutions

day traders

Short selling isn't for everyone. It involves a great amount of time and dedication. Short sellers need to be

informed, skilled and experienced investors in order to succeed.

They must know:

how securities markets work

trading techniques and strategies

market trends

the firm's business operations

Short Selling: The Transaction

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ByBrigitte Yuille

Suppose that, after hours of painstaking research and analysis, you decide that company XYZ is dead in the

water. The stock is currently trading at $65, but you predict it will trade much lower in the coming months. In

order to capitalize on the decline, you decide to short sell shares of XYZ stock. Let's take a look at how this

transaction would unfold.

Step 1: Set up amargin account. Remember, this account allows you to borrow money from the brokerage

firm using your investment as collateral.

Step 2: Place your order by calling up the broker or entering the trade online. Most online brokerages will

have a check box that says "short sale" and "buy to cover." In this case, you decide to put in your order

to short 100 shares.

Step 3: The broker, depending on availability, borrows the shares. According to the SEC, the shares the firm

borrows can come from:

the brokerage firm's own inventory

the margin account of one of the firm's clients

another brokerage firm

You should also be mindful of the margin rules and know that fees and charges can apply. For instance, if the

stock has a dividend, you need to pay the person or firm making that loan. (To learn more, read the Margin

Tradingtutorial.)

Step 4: The broker sells the shares in the open market. The profits of the sale are then put into your margin

account.

One of two things can happen in the coming months:

The Stock Price Sinks (stock goes to $40)

Borrowed 100 shares of XYZ at $65 $6,500

Bought Back 100 shares of XYZ at $40 -$4,000

Your Profit $2,500

The Stock Price Rises (stock goes to $90)

Borrowed 100 shares of XYZ at $65 $6,500
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Bought Back 100 shares of XYZ at $90 -$9,000

Your Profit -$2,500

Clearly, short selling can be profitable. But then, there's no guarantee that the price of a stock will go the way

you expect it to (just as with buying long).

Shorter sellers use an endless number of metrics and ratios to find shortable candidates. Some use a similar

stock picking methodology to the longs, but just short the stocks that come out worst. Others look forinsider

trading, changes in accounting policy, orbubbleswaiting to pop.

One indicator specific to shorts that is worth mentioning is short interest. Short interest is the total number o

stocks, securities or commodity shares in an account or in the markets that have been sold short, but haven't

been repurchased in order to close the short position. It serves as a barometer for a bearish or bullish marke

For instance, the higher the short interest, the more people will anticipate a downturn. (For more insight,

readShort Interest: What It Tells Us.)

Short Selling: The Risks


ByBrigitte Yuille

Now that we've introduced short selling, let's make one thing clear: shorting is risky. Actually, we'll rephrase

that. Shorting is very, very risky. It's not unlike running with the bulls in Spain: you can either have a great

time, or you can get trampled.

You can think of the outcome of a short sale as basically the opposite of a regular buy transaction, but the

mechanics behind a short sale result in some unique risks.

1. Short selling is a gamble. History has shown that, in general, stocks have an upward drift. Over the

long run, most stocks appreciate in price. For that matter, even if a company barely improves over the

years,inflationshould drive its stock price up somewhat. What this means is that shorting is betting

against the overall direction of the market.

So, if the direction is generally upward, keeping a short position open for a long period can become

very risky. (To learn more, readStocks Are No.1andThe Stock Market: A Look Back.)

2. Losses can be infinite. When you short sell, your losses can be infinite. A short sale loses when the

stock price rises and a stock is (theoretically, at least) not limited in how high it can go. For example,

you short 100 shares at $65 each hoping to make a profit but the shares increase to $90 apiece, you

end up losing $2,500. On the other hand, a stock can't go below 0, so your upside is limited. Bottom

line: you can lose more than you initially invest, but the best you can earn is a 100% gain if a compangoes out of business and the stock loses its entire value.
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