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What is short selling that erased $65 billion of Adani group in three days?

Most shares of Adani Group fell sharply on Monday as the Indian conglomerate's rebuttal of criticism by an American short seller failed

By Ground report 31 Jan 2023

New Update

Insider trading in Adani group confirmed by Financial Times

Most shares of Adani Group fell sharply on Monday as the Indian conglomerate's rebuttal of criticism by an American short seller failed to appease investors, deepening a market slide that has now led to losses of $65 billion in value of group shares.

Asia's richest man Gautam Adani, the Indian group clashed with Hindenburg Research and on Sunday responded to the short seller's report last week raising concerns about its debt levels and use of tax havens.

Adani said that he complied with all local laws and had made the necessary regulatory disclosures.

Adani Transmission, Adani Total Gas, Adani Green Energy, Adani Power and Adani Wilmar all fell between 5% and 20% on Monday.

Flagship Adani Enterprises, which faces a crucial test this week with a follow-on share offering, wavered between gains and losses before settling 4.8% higher.

It was held well below the offering price of the issue, which if successful will be the largest share offering of its kind ever made in India.

Adani Enterprises' $2.5 billion secondary stock sale closed its second day amid weak investor sentiment. The stock closed at Rs 2,892.85, 7% below the Rs 3,112 low end of the offer price band. The upper band is Rs 3,276.

What is short selling?

Short selling is used in the stock market to make a quick sale and make a decent profit in a short time. Long-term investors buy stocks and expect them to rise in the future, while short sellers measure the state of prices and profit from falling prices.

Simply put, shorting is an investment strategy with the motive of "buy low and sell high" in order to collect some profit. Investors who sell stocks short expect stock prices to drop at a future date and are looking to capitalize on this prediction for some profit.

It depends on the speculation. To short stocks, traders tend to sell shares that they don't actually own, but rather borrow from a stockbroker, thus opening a position to trade.

They sell it at the prevailing market exchange rate, so they short the position and wait for prices to drop. To close out such a position, traders must buy back the shares they shorted.

Short selling can also occur through options or derivatives trading. Here, an investor enters a short sale trade by placing a sell order to open, and when he is ready to buy back the shares, he closes the position via a buy order to cover.

The advantage of shorting options is that they have the option to sell the asset at a later date based on a fixed price in their contracts.

Short circuit example

XYZ Corp. is trading at $50 per share. An investor borrows 100 shares and sells them for $5,000. XYZ Corp's price suddenly drops to $25 per share, so they immediately buy 100 shares to replace the borrowed ones. Your profit is $2,500.