Short Selling in the Stock Market: Complete Guide With Practical Examples, MIS Orders and Auction Risks

 

Short selling often sounds confusing to beginners because it flips the natural order of a trade. Normally we buy first and sell later. In short selling, the sequence is sell first and buy later. This reverse order helps traders profit when markets are falling.

This guide breaks down:

• What short selling really means
• Why and when traders use short selling
• How MIS orders work
• What happens if you cannot buy back shares
• What is an auction market
• Key risks to understand
• SEBI’s stance on short selling

Let’s simplify everything step-by-step.

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1. What Is Short Selling?

In a regular trade:

1. You buy a stock (say ₹100)

2. It goes up (₹120)

3. You sell and make profit (₹20)

You do this when you are bullish.

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Short Selling Is the Exact Opposite

You use it when you feel a stock price will fall.

Example:

• Current price = ₹150
• You expect it to fall to ₹120
• You sell first at ₹150 (even though you don’t own it)
• Later you buy at ₹120

Your profit = ₹150 – ₹120 = ₹30 per share

Short selling allows you to earn money in falling markets.

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2. Why Does This Work? Who Allows It?

You may wonder:

“How can I sell something I don’t have?”

Answer:
SEBI — India’s regulatory body — allows short selling, but with strict conditions. That’s why brokers allow you to sell first and buy later.

Selling first is possible because:

• The system reserves those shares temporarily
• You must buy back on the same day
• You cannot carry a short position overnight

This leads us to MIS orders.

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3. What Is an MIS Order? (Margin Intraday Square-off)

MIS = Margin Intraday Settlement

It means:

• Positions must be squared off on the same day
• You cannot carry forward a short sale
• Brokers auto-square-off if you don’t do it manually

Auto Square-off Timing

• Many brokers: 3:10 PM
• Zerodha: around 3:20 PM

If you don’t square off your short position yourself, the broker will automatically close your trade to avoid risk.

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4. How Short Selling Works (Example With Quantities)

Let’s assume:

• You sell 100 shares at ₹150
• After 1 hour, price falls to ₹140
• You buy back 100 shares

Your order book shows:

• When selling: –100
• When buying: +100

Net position = 0 (intraday only)

Profit:

₹150 – ₹140 = ₹10 per share = ₹1,000

This is how every short-selling trade works.

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5. Will You Receive Delivery of Shares?

No — not if your net position becomes zero.

You sold 100
You bought 100
Net = 0 → No delivery

Only if you buy more than you sold (for example, sell 100 and buy 120) will the extra 20 shares be delivered — depending on whether the buy order was CNC or MIS.

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6. The Biggest Risk: What If the Stock Hits Upper Circuit?

This is where traders lose the MOST.

Example:

You short at ₹150
The stock jumps to ₹180

It gets stuck at upper circuit

All buyers

No sellers

You are desperately trying to buy, but no seller exists.
You cannot exit manually.
Market closes.

Your MIS position is still –100.

Now what?

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7. What Happens After Market Closes? Auction Market

After 3:30 PM:

• Retail traders CANNOT participate
• Brokers enter a special auction session (approx. 30 min)
• Broker must buy shares on your behalf

Suppose the broker buys at ₹170:

• Your sell price = ₹150
• Buy price in auction = ₹170
• Your loss = ₹20 per share

You MUST accept this loss because you failed to square off.

This is why short selling is riskier than normal buying.

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8. When Countries Ban Short Selling

Short selling is legal in India because SEBI allows it.
However, many countries ban it temporarily during crises.

Examples:

• In 2011: France, Spain, Italy, Belgium banned it
• During COVID-19: China banned short selling in certain indices

Had India banned it, short selling would become impossible overnight.

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9. Key Rules You MUST Remember Before Short Selling

✔ Short selling is allowed only intraday
✔ Use MIS orders only
✔ Must square off the position before broker’s auto square-off time
✔ Avoid stocks known for hitting circuits (low volume, operator-driven)
✔ Avoid shorting news-sensitive stocks
✔ Understand auction risks — losses can escalate fast
✔ Use stop-loss without fail

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10. Conclusion

Short selling is a powerful strategy when used correctly, especially in falling markets. But it carries much higher risk than normal buying because:

• Losses are unlimited
• Upper circuits can trap traders
• Auction penalties can be severe

If you choose to use short selling, make sure you understand:

• MIS order rules
• Circuit limitations
• Square-off deadlines
• Auction consequences

Handled responsibly, short selling can be an excellent tool for intraday traders.