Explainer: What is short selling that Hindenburg repeatedly accuses the Adani Group of?
Hindenburg is back in the news. Last year, it made over Rs 33 crore by short selling Adani shares. It has once again done something similar. The American company Hindenburg has once again opened fire on the Adani Group. But this time Hindenburg has not only accused Adani but also SEBI. This whole game is short selling. If you have also heard this word again and again but don’t know its meaning, then let us tell you what short selling is and how it helps a company earn.
What is short selling?
In short selling, the stockbroker makes money not from the rise of the stock but from its fall. This is called short selling stocks. Traders who sell short are called short sellers. This is a high-risk, high-reward method where a lot of money can be made, but if the bet goes wrong, the trader can be stuck in debt. In short selling, a trader borrows shares from his broker. He promises to return this share to the broker after a certain time with some interest. The short seller sells the borrowed shares on the market at a higher price, hoping that after a few days the price of the shares will go down and he will buy them back at a cheaper price and return them to the broker. He will give the broker a part of the profits made by selling at a higher price and buying at a lower price as interest. In addition, the shares bought at cheap prices will also be returned to the broker.
This is how stocks are sold short
Big investors in the stock market make money from both rising and falling prices. Talking about short selling, it is a way of making money by pushing down prices in the stock market. Let us understand this with an example. Short sellers first sell the target stock. Suppose a stock is currently worth Rs 500, but the short seller thinks that the stock may fall to Rs 400 in a week. Now the short seller borrows 100 shares of that company from the broker and sells them. After a week, the stock falls to Rs 400. Now he buys 100 shares from the open market and returns the shares he borrowed from the broker.
This is how investors make money from short selling
In this case, the short seller earned Rs 100 for each share of the target company. The shares he had borrowed at a price of Rs 500 he got back for just Rs 400. That means a profit of Rs 100 for each share. In this way, he made a profit of Rs 10,000 by short selling just 100 shares in a week. In the case of the Adani group, Hindenburg first took a short position on the shares and then issued a controversial report to push down the price. In other words, it can also be said that he deliberately pushed down the share price of Adani to make his profits.
Why is short selling bad for the market?
By now you must have understood how risky this style of trading is due to the short selling technique. This is as bad for the market as it is for the investors. In this case the broker lends the shares for a certain time. If the share price rises instead of falling within that stipulated time, the trader will have to buy back those shares at an expensive price and return them to the broker with interest, which can even make him a debtor. Therefore, short selling is usually done only by very experienced traders. Hindenburg is also a short selling company. It keeps an eye on those companies whose shares are unexpectedly rising at a high speed. Hindenburg researches it for months and if it finds something wrong, it exposes it to the public by taking a short position. This causes the company’s shares to plummet and Hindenburg makes money by short selling.
How much did Hindenburg make from short selling?
Last year, Hindenburg was a big fan of short selling in Adani shares and levelled numerous allegations against the company, due to which its shares plummeted. According to Mint’s report, Hindenburg had earned $4 million (Rs 33.58 crore) last year from short selling in Adani shares. This time Hindenburg has made headlines by accusing SEBI chief Madhabi Puri Buch.
