Hindenburg, the organization which published the report accusing Adani Group of manipulating stocks earned a huge profit after Adani’s shares began to tumble. This is not the first time that the organization has earned money out of falling stocks, the entire business model of Hindenburg revolves around a process that is called “Short Selling.”
What is short selling?
Short selling is a practice of stock trade in which a person bets on the fall of a company rather than on its profit. In this process, the person borrows those shares from a broker which he expects to fall in the future, later that person sells those stocks in the open market, and after the stocks fall he re-buys them, and returns it to the broker paying a little price and keeping the remaining as his profit.
Suppose the share price of a company is 50 rupees, Mr.X borrows the shares and sells them in the open market, and a little later the price of those shares falls to 10 rupees, then Mr.X rebuys it, return it to the broker pay the borrowing fee of 10 rupees and keeps 30 rupees as his profit.
Using the same modus operandi Hindenburg group makes millions in profit and they eventually made it in the Adani case.
Risks in Short Selling
The way of earning money through short selling seems secure but the reality is completely different from it, in short selling, there are chances of suffering from the most amount of loss. As if the stocks rose instead of falling, then the short seller would have to pay extra money to the broker from his pocket.
For eg in the case of Mr. X if the price of shares would have risen to 100 rupees then X would have to pay double the price of the share from the time he borrowed them.
The loss of the short seller increases with the rise in the share price of that company, this could make the loss percentage limitless as there is no extent to which the stock can go up.
Conclusion
There are tons of risks in the stock market, so we must be very careful while investing in it, we must also be aware of global events to make the best prediction and safeguard ourselves from any loss.
Talking about Hindenburg vs Adani, Hindenburg might have won the first round but the battle is still not over, if Adani manages to prove himself innocent and Hindenburg’s claims false then Hindenburg would suffer from unbearable loss, as they are the short seller here, the group can also get bankrupt if Adani’s shares take a massive boom.