When you short in the spot market, you obviously sell first. The moment you sell a stock, the backend process would alert the exchange that you have sold a particular stock. The exchange does not differentiate between a regular selling of stock (from DEMAT account) and a short sale. From their perspective they are of the opinion that you have sold the shares which would obligate you to deliver the same. In order to do so, you need to keep the shares ready in your DEMAT account by next day. However the exchange would know about your obligation only after the market closes and not during the market hours.
After you short, the price has not declined as expected and hence you decide to wait for another day. However at the end of the day, exchange would figure out that you have sold shares during the day, hence you would be required to keep these shares ready for delivery. However you do not have these shares for meeting your delivery obligation. This means you will default against your obligation; hence there would be a hefty penalty for this default. This situation is also referred to as “Short Delivery”.
never get into the ‘short delivery’ situation, always make sure you close your short trade before the market close, else the penalty could be as high as 20% above your short price.
Under a short delivery situation, the exchange would take up the issue and settle it in the auction market.
Also, this leads us to an important thought – the exchange anyway checks for the obligations after the market closes. Hence before the exchange can run the ‘obligation check’ if one were to cover the short position (by squaring off) then there would be no obligation at all by end of the day. Hence for this reason, shorting in spot market has to be done strictly as an intraday trade without actually carrying forward the delivery obligation.
A short position created in the futures market can be carried forward overnight.
he ‘futures’ is a derivative instrument that just mimics the movement of its respective underlying. So if the underlying value is going down, so would the futures. This means if you are bearish about a stock then you can initiate a short position on its futures and hold on to the position overnight.
Similar to depositing a margin while initiating a long position, the short position also would require a margin deposit. The margins are similar for both the long and short positions and they do not really change.
Glasp is a social web highlighter that people can highlight and organize quotes and thoughts from the web, and access other like-minded people’s learning.