Selling: Banks & Newspaper Seller

Selling and Buying are 2 most important activities in any trade. People always think buying can happen individually without selling (in other words they think it is an standalone activity). However most people think, to sell anything you need to buy first. Let us understand this concept, Selling can happen without owning things prior or without buying things prior. In other words, buying is not the first activity to happen in any trade, selling can also happen first

Most people would wonder, how can i sell something without buying anything or owning it prior ? Lets take an example of a man who is selling news papers in railway station, bus station or any other public places in India. I'm not speaking about a person who is having a small stall and selling news papers and books. I'm talking about the person who walks all round the place, carrying the newspaper and selling the papers. Do you think, he is selling the papers buy owning it prior. No, he borrows those newspapers from the stall owner and sells it across to the people who comes to the station

For this activity, the newspaper seller gives the confidence to the stall owner that he will not cheat him. This is a kind of security given by the paper seller to the stall owner. So to perform this activity a kind of security is enough. So, the process flow is as below

• Provide security and get the product
• Sell the product
• Take your profit
• Give the base money to the owner
• Withdraw your security

At the end, he takes his profit out of his selling and gives the margin money to the shop owner. Let us understand this in a different way (a bigger picture). Imagine banks as that newspaper seller and Central bank (RBI) as the stall owner. Banks borrow money from RBI not owning it prior (say @ 4% interest) by giving security and sells it to its customers in terms of loan and collects the higher interest (say @ 7% interest to 12% interest). The 3% to 8% excess interest received is the profit to the bank

So, the top level of Indian financial system works by selling without owning it prior. But most people think they need to buy before selling. There are also many opportunities in stock market to sell stocks and later which can be bought. Many people created a myth that, it is more risky to sell first and buy next. If buying first is not risky, why most people in stock market lose money. Does that mean people who buy first always many money in stock market without risk ? 

I'm not saying buying first will not give profit. It definitely gives profit in long term on the quality stocks. It is point to note that Selling first can also give profit. It is not necessary that stock price should go down to make profit in selling first. There are concepts like time decay and premium decay in options, which give profits on selling without stock price going down

Selling First - Is it Optimistic Approach ?

Selling should not be considered as the activity of pessimism. Selling can also be optimistic activity. Let us see how 

• Buying Call Option means Stock price should go up to make profit - Optimistic approach

• Selling Put Option means Stock price should go up to make profit - Optimistic approach

Certain pessimistic activity in stock market can also be consider as optimistic activity considering the hedging concept. Say, If we Sold Put option (which means stock price should go up to make profit), for this we buy put option as an hedge. This hedge or buying put option cannot be considered as pessimistic activity. If a trader buys naked put option (which means stock price should go down to make profit) is an pessimistic activity

Let us avoid certain pessimistic activity and use selling in an optimistic way and create wealth.

Have a Great Day

B G Nareshkumar