Qty during short selling

General
1

Hello Experts -

During going long, we can buy Qty as per the cash / amount we have in our account. But during Short selling, how much maximum qty we can go for selling. Since it is Intraday, do we really pay the buying amount to broker during closure of the transaction ? So what is the logic of putting Qty while selling the stock initially under Short Selling ? Is there any connection of cash / amount we have in our demat account vs Qty we are putting in Short Selling ?

Thanks.

2

Hello Trader,

  1. Assume you have Rs. 10,000 in your trading account.

So when you want to buy (or short sell) a specific stock costing Rs.10 each, the computer does not automatically decide how many you can buy with 10,000.

You need to manually enter the quantity; say like QTY 1000 of share price 10 each = 10,000.

  1. Now, If you are planning to BUY the above shares and SELL it (or vice versa) on the same day, the broker provides a intraday facility called the LEVERAGE.

Different shares have different leverage rating based on risk.

Imagine the stock you decided to buy and sell has a leverage rating of 8x.

Now, using the above leverage facility from your broker, you can buy the same shares upto 8x more.

So, with a capital of Rs.10,000 and leveraging it 8x you can buy the same shares to a total value of Rs.80,000.

(80,000(leveraged capital) divide by Rs.10 each share = 8000 shares)

So with just Rs.10,000 in your account you have BOUGHT or SHORTSOLD 8000 shares worth Rs.80,000

  1. At the end of the day when the broker closes your position, your capital is adjusted only with the NET EFFECT OF YOUR TRADE and not the total value of the transaction

To conclude:

In the MORNING you have shortsold 8000 shares priced at RS.10 and in the EVENING when you have closed the position the shares have reduced in price to Rs.9

SO

SHORTSOLD TOTAL VALUE in the morning= 80,000 (8000shares at Rs.10 each)

Evening buy back value = 72,000 (8000shares at Rs.9 each)

Net adjusted amount = 80,000 - 72,000 = 8000

The NET EFFECT OF Rs. 8,000 profit is added to your trading capital.

1 Like
3

how to find the leverage rating wrt individual stock ? to decide the leveraged amount ?

4

https://zerodha.com/margin-calculator/Equity/

5

wow…this is great…i just found out the stock I shorted today had 11x margins available under MIS…I did not know that hence could not make full use of the tools…Thanks again.

6

in the above example you shared, I have another query / doubt -
If I have 10000 Rs in my account, out of which I have already used 9000/- to buy equity shares which give me balance of Rs 1000/- in the account to be used further. Now margin I can be used e.g. 8X will be based on 1000/- or 10000/- ?
Also assuming I can use 8X for only 1000/- and then suppose I make loss which is less than 1000 then I assume, it will be deducted from my 1000/- balance. But what if I make loss more than 1000/-, how the loss will be deducted from my account.
Thanks.

7
  1. Leverage calculated on the remaining Free Cash which in this case is 1000,
  2. As soon as you MTM balance starts going negative to near 1000, the position is closed automatically by the broker’s RMS computer (RISK MANAGEMENT SYSTEM). You are not allowed to loose more than what you have in your trading account.
8

thanks for the response…

9

@w0527282 A word of caution. leverages may seem to a beginner a way to make money easily But they forget the risk assosiated with this. Complete capital can be easlily wiped out using leverage.