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GS Paper: GS3

  • [pib] GreenCo Rating System

     

     

    The Union Ministry of Railways has informed about the applications of Greenco Ratings on Workshops and Production Units of Indian Railways.

    GreenCo Ratings

    • GreenCo Rating is the “first of its kind in the World” holistic framework that evaluates companies on the environmental friendliness of their activities using life cycle approach.
    • Implementation of GreenCo rating provides leadership and guidance to companies on how to make products, services and operations greener.
    • It is developed by Confederation of Indian Industry’s (CII) Sohrabji Godrej Green Business Centre.
    • It has been acknowledged in India’s Intended Nationally Determined Contribution (INDC) document, submitted to UNFCCC in 2015.
    • GreenCo rating is applicable to both manufacturing facilities and service sector units.
    • The rating is implemented at unit or facility level. The unit or facility has to be in operation for a minimum period of 3 years. In case of new plants/ facilities minimum 2 years operation is required.

    Utility

    It helps the industrial units in identifying and implementing various possible measures in terms of energy conservation, material conservation, recycling, utilization of renewable energy, GHG reduction, water conservation, solid and liquid waste management, green cover etc.

  • [pib] Friction-reducing Nanocomposite Coatings

    A group of scientists at the International Advanced Research Centre for Powder Metallurgy & New Materials (ARCI) have developed a process for size-selective deposition of nanocomposite coatings which can reduce friction of these dynamic systems.

    What are Nanocomposites?

    • Nanocomposite coatings are formed by mixing two or more dissimilar materials at nanoscale to improve the physical, chemical and physicochemical properties of the new materials.
    • The scientists have found that nickel tungsten-based coatings with infusion of particular sized Silicon Carbide (SiC) submicron particles using a pulsed electroplating can provide an excellent combination of wear and corrosion resistance.

    Applications

    • Many aerospace, defence, automobile, space devices need to reduce friction, wear, and tear to enhance the life of components.
    • Lubricating these dynamic systems add to the cost, complexity, and weight of these systems.
    • The coating could help in reducing the friction of such devices.

  • [pib] Potential Fishing Zone (PFZ) Advisories

    The Indian National Centre for Ocean Information Services (INCOIS), Hyderabad has reported that Oceansat Satellite data from ISRO are used to prepare the PFZ advisories on the potential rich fishing areas and provide to the sea faring fishermen in all states.

    Potential Fishing Zone (PFZ)

    • This is the first advisory service started by INCOIS. The backbone of this service is the real-time data for ocean color and SST provided by the OCEANSAT and NOAA respectively.
    • This service was started because there was a need to identify the potential fishing zones to help the fishermen to get better catch while they were at the sea.
    • This service was started by the Ministry of Earth Sciences with the help of the Department of Space and several institutions under the Ministry of Agriculture.

    How it works?

    • This service makes use of parameters such as sea surface temperature and chlorophyll content provided by NOAA-AVHRR and Oceancolor satellites.
    • Features such as oceanic fronts, Meandering Patterns, Eddies, Rings, Up Welling areas etc. are identified sites for fish accumulation.
    • These features can easily be identified from Sea Surface Temperature and Chlorophyll data.
    • The availability of Chlorophyll from OCEANSAT and MOdDIS has further enriched these advisories in the recent years.
    • Hence, PFZ advisories have helped the fishing community to locate the fishing zones with accuracy.

    Special advisories for fisherman

    • Another feature of PFZ service is the generation of species-specific advisory to enable the fishermen folk to distinguish between the exploited and under-exploited species in the potential fishing zones.
    • This enables them to have sustainable fishery management by targeting only the under-exploited species in the fishing zones.
    • This approach enables them to avoid fishing the over-exploited species over and over again.

  • Triggering a Global Financial Crisis

    Context

    Although we could not have predicted it, Covid-19 was not the reason, but just the trigger for the ongoing financial crash as all we needed was the proverbial straw to break the finance sector’s back

    Economic sudden stop

    • Not just any trigger: Covid-19 was not just any trigger as it gave birth to the concept of the economic “sudden stop.” When the global equity markets dropped on 31 January 2020 following the WHO declaration of the Public Health Emergency of International Concern, El-Erian (2020) warned the investors on 2 February 2020 that they should snap out of the “buy the dip” mentality.
      • Pointing out two vulnerabilities, namely structurally weak global growth and less effective central banks, he introduced the concept of “sudden stop” economic dynamics.
    • What is sudden stop? It can be considered as an abrupt onset of a deep recession.
      • Supply and demand shock: In the case of Covid-19, it is a sudden stop of economic activity resulting in supply and demand shocks to the global economy as major cities in infected countries, more than 100 and counting, are put on lockdown.
      • And, add to that the deepening oil price war between Russia and Saudi Arabia.
    • On 8 March 2020 in New York, the futures markets opened and oil futures (both Brent and WTI) are trading about 21% down, gold is above $1,700 per ounce, and all United States (US) equity index futures are trading about 4% down.
    • Long terms treasury yield at historical lows: What is worse is that with the long-term US Treasury yields at their historical lows (10-year yield below 0.5% and 30-year yield below 1%), the capital markets are frozen (not to mention many oil projects that will go bust at these prices).

    Disorderly non-financial private sector debt leading to dire consequences

    • A disorderly global non-financial private sector debt deleveraging, which is likely to lead to deep global debt deflation, followed by a recession (and possibly a depression).
      • Which could result in creating financial and economic instabilities, and further tensions in international relations with dire consequences for emerging and developing countries, not to mention developed countries.
    • Difference in developed and developing countries debts: While in developed and high-income developing countries, the non-financial private sector is more over-indebted, in middle-income and low-income developing countries, the public sector is more over-indebted.
    • Impact on developed economies: Given that the global non-financial private sector debt deleveraging has already started, the public sector debts of the developed and high-income developing countries will also go up and the governments’ ability to rescue their economies will also decline in these countries.
    • Impact on funding for climate change: Furthermore, this will severely constrain the governments’ ability to spend on climate change-related projects to address the potentially catastrophic effects for many years to come, diminishing our hopes to make the necessary investments and innovations to address the now existential climate crisis on time will diminish.
    • The corona factor: The measures we have to take to control the spread of Covid-19 before a cure is found will further challenge the financial system, as people stop earning an income and businesses go bankrupt.

    Way forward

    • Three authorities solution: In the suggested framework, there would be three authorities to maintain a deposit account at the central bank in each country
      • 1. A deleveraging authority for leverage reduction.
      • 2. Lastenausgleich (based on German Currency Reforms) authority for capital levies.
      • 3. Climate authority for financing needs in developing national climate plans.
      • These national authorities should be globally coordinated through the appropriate United Nations agencies.
    • Control the three authorities: The Lastenausgleich authority would be under the finance ministry, whereas the deleveraging and climate authorities would be not-for-profit corporations promoted by the government.
    • Capitalisation issue: The government would capitalise the deleveraging and climate authorities by the Treasury-issued zero-coupon perpetual bonds.
    • The deleveraging authority would then sell its equalisation claims to the central bank in exchange for an increased balance in its deposit account at the bank, while the climate authority would wait until the deleveraging concludes.
      • Further, the climate authority would not be allowed to open deposit accounts to its borrowers to ensure that it would be a pure financial intermediary, not a bank.
    • Framework: Assuming that a globally agreed-upon debt reduction percentage that would bring the global non-financial sector leverage well under 100% is determined and that all countries agree to act simultaneously, the framework is as follows
      • (i) the financial institutions comprising the banks and non-bank financial institutions (NBFIs) write down all the loans and debt securities on both sides of their balance sheets by the required percentage;
      • (ii) the deleveraging authority compensates the banks and NBFIs for the loss if any; and
      • (iii) the deleveraging authority pays each qualified resident their allocated amount less than the debt relief if any.
      • If an NBFI gain after the above debt reduction, it should owe equalisation liabilities to the deleveraging authority of its jurisdiction.
      • Note that as all debts mean all debts, public sector debts will also be written down by the same percentage except the official debts of the sovereigns that fall out of the scope of our proposed framework and should be handled by other means.
    • After deleveraging: After deleveraging the balance of the deleveraging authority account at the central bank goes down whereas the total balance of the bank accounts (reserves) at the central bank goes up by the total payment made by the deleveraging authority.
      • Hence, the base money goes up by the total payment of the deleveraging authority.
      • Since NBFIs and residents cannot maintain deposit accounts at the central bank, they have to be paid through a bank which creates deposits for the NBFIs and residents against reserves.
      • Hence, the broad money goes up by the amount of the payment to the NBFIs and residents.
    • Issue of multi-currency balance sheet: One issue is that in many countries, the bank and NBFI balance sheets are multi-currency balance sheets.
      • However, the deleveraging authority payments are in domestic currency, which may create currency risk for some banks and NBFIs.
      • Backed by the central banks, the globally coordinated national deleveraging authorities should stand ready to intervene to avoid potential crises.
    • Condition to spend on climate bonds: The authorities would require their domestic banks and other financial institutions to spend an internationally agreed-upon percentage of their newly found money, if any, after the deleveraging on the interest-bearing, finite-maturity bonds the national climate authorities would issue.
      • Since the promoter of the climate authority is the government, the bonds of the climate authority would have the same credit with the government bonds, and the central bank would accept the climate authority bonds in its open market operations.
    • Climate authority bonds as reserves: Therefore, the climate authority bonds would be the main tool to manage the reserves and deposits created through the equalisation claims.
      • In addition, the climate authority bonds could be used for the greening of the financial system through the investment of foreign exchange reserves of the central banks proposed by the Bank of International Settlements (BIS 2019).
    • Progressive wealth tax collection: Lastly, equipped with a “globally coordinated wealth registry” (Stiglitz et al 2019), the Lastenausgleich authorities would collect progressive wealth taxes from the owners of real and non-debt financial assets for the equalisation of burdens.
      • While a part of these taxes could be used to retire some of the equalisation claims and the corresponding reserves and deposits created in the deleveraging process, another part could be transferred to the climate authorities, and the rest could be spent in the interests of the society.

  • PCR Test for Diagnosis of the COVID-19

     

    The diagnosis of COVID-19 can be done with the Polymerase Chain Reaction (PCR) Test which is explained as under:

    The PCR Test

    • It uses a technique that creates copies of a segment of DNA. ‘Polymerase’ refers to the enzymes that make the copies of DNA.
    • Kary Mullis, the American biochemist who invented the PCR technique, was awarded the Nobel Prize for Chemistry in 1993.
    • The ‘chain reaction’ is how the DNA fragments are copied, exponentially — one is copied into two, the two are copied into four, and so on.
    • However, SARS-COV-2 is a virus made of RNA, which needs to be converted into DNA. For this, the technique includes a process called reverse transcription.
    • A ‘reverse transcriptase’ enzyme converts the RNA into DNA. Copies of the DNA are then made and amplified.
    • A fluorescent DNA binding dye called the “probe” shows the presence of the virus. The test also distinguishes SARS-COV-2 from other viruses.

    Various Stages:

    1) Collection and transport

    • Testing centre takes swabs from nasal cavities and back of the throat (pharynx), and puts samples in a “virus transport medium”, which contains balanced salts and albumin to prevent the virus from disintegrating.
    • Sample is then transported in cold storage to the testing lab.

    2) Extraction of viral RNA

    • Coronaviruses have large single-stranded RNA genomes.
    • Testing lab extracts the RNA from the samples, using commercially available kits.

    3) Putting THE RNA in THE PCR mix

    • Extracted RNA is added to a polymerase chain reaction (PCR) mix.
    • This includes the ‘master mix’, which contains a ‘reverse transcriptase’ enzyme that converts the RNA into DNA.
    • Master Mix contains Taq polymerase, the enzyme that creates copies of the DNA, nucleotides, as well as other elements such as magnesium — an ion of which is needed to amplify the DNA.
    • The PCR mix also contains ‘reagents’ such as ‘primers’ and ‘probes’.
    • Primers are particular strands of DNA that are designed to bind with the DNA that is to be copied; probes are used to detect the specific sequence in the DNA sample.
    • Finally, the PCR mix consists of a “housekeeping” gene — a normal human gene (RNAse P) that is used to ensure that samples were properly collected, and RNA extracted.

    4) Amplification of the viral DNA

    • Sample, in its PCR mix, is put into tubes or plates, which are then put in a thermal cycler machine that is used to conduct the PCR process.
    • First, the RNA is converted into DNA. Then the process of copying the genes starts.
    • The thermal cycler heats and cools the mixture with the sample, alternating between three temperatures — for melting the DNA to separate the two strands.
    • The thermal cycler runs 30-40 such cycles in order to amplify the DNA to check for the virus.

    5) Testing against controls

    • Amplified DNA is tested against a positive control, which usually consists of genes of the virus cloned into plasmid, and a negative control, which is a ‘known’ sample that has tested negative for the virus earlier.
    • RNase P should show amplification, positive control should be positive, negative control should be negative, and then whatever result you get for the specimen, is the correct result.
    • In order for a test to be valid before the result is released, certain ‘validity criteria’ have to be met.
    • If the housekeeping gene (RNase P) is positive, positive control is positive, negative control is negative, and the sample does not show any PCR positive result, the sample is declared negative.
    • If the PCR result is positive, the patient has COVID-19.

  • Dumping of Radioactive Nuclear Waste

    In a controversial move, Japan has decided to dump the radioactive heavy water from the Fukushima nuclear power plant into the Sea.  The dumping of nuclear waste is considered to be the easiest way to get rid of it.

    What is Heavy Water?

    • Heavy water (deuterium oxide) is a form of water that contains a larger than normal amount of the hydrogen isotope deuterium rather than the common hydrogen that makes up most of the hydrogen in normal water.
    • Heavy water is used in certain types of nuclear reactors, where it acts as a neutron moderator to slow down neutrons.
    • Slowed neutrons are more likely to react with the fissile uranium-235 than with uranium-238 which captures neutrons without fissioning.

    Where is Fukushima waste?

    • It is currently being stored in large tanks, but those are expected to be full by 2022.
    • Almost 1.2 million liters of radioactive water from the Fukushima nuclear power plant is to be released into the ocean.
    • The contaminated water has since been used to cool the destroyed reactor blocks to prevent further nuclear meltdowns.

    Hazards of the nuclear contamination

    • Radioactive pollution in the ocean has been increasing globally — and not just since the disaster at Fukushima.
    • Radiation levels in the sea off Fukushima were millions of times higher than the government’s limit of 100 Becquerel.
    • A single Becquerel that gets into our body is enough to damage a cell that will eventually become a cancer cell.
    • Even the smallest possible dose, a photon passing through a cell nucleus, carries a cancer risk. Although this risk is extremely small, it is still a risk.

    Who else dumped radioactive water into oceans?

    The dumping of nuclear waste in drums was banned in 1993 by the London Convention on the Prevention of Marine Pollution. But discharging liquid contaminated with radiation into the ocean is still permitted internationally.

    • The lion’s share of dumped nuclear waste came from Britain and the Soviet Union, figures from the IAEA show.
    • By 1991, the US had dropped more than 90,000 barrels and at least 190,000 cubic meters of radioactive waste in the North Atlantic and Pacific.
    • To this day, around 90% of the radiation in the ocean comes from barrels discarded in the North Atlantic, most of which lie north of Russia or off the coast of Western Europe.

  • Danube-Oder-Elbe Canal

     

    Environmental organisations from across central and Eastern Europe have criticised a major project intending to link three rivers and provide seamless navigation between three of Europe’s peripheral seas, according to a statement.

    Danube-Oder-Elbe Canal

    • For centuries Europe’s rulers have dreamed of construction of a huge Y-shaped canal connecting the Elbe, Oder and Danube rivers, most of which would be on Czech territory.
    • The Canal intends to connect the Danube, Oder and Elbe rivers and thus provide another navigable link from the Black Sea to the North and Baltic Seas.
    • The Main-Danube Canal already provided a navigable connection between the Black Sea and the North Sea.
    • Several hundred kilometres of artificial waterways would have to be built for the canal, according to the statement.
    • Critics have called on the European Commission to ensure that the project be excluded from EU funding, and not be included as part of the Trans-European Transport Network.

  • Essential Commodities

    The Price Monitoring Division (PMD) in the Department of Consumer Affairs is monitoring the retail and wholesale prices of 22 essential food commodities due to increased panic buying by customers.

    Essential Commodities Act

    • The ECA is an act which was established to ensure the delivery of certain commodities or products, the supply of which if obstructed owing to hoarding or black-marketing would affect the normal life of the people.
    • The ECA was enacted in 1955. This includes foodstuff, drugs, fuel (petroleum products) etc.
    • It has since been used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
    • Additionally, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
    • The list of items under the Act includes drugs, fertilizers, pulses and edible oils, and petroleum and petroleum products.
    • The Centre can include new commodities as and when the need arises, and takes them off the list once the situation improves.

    How ECA works?

    • If the Centre finds that a certain commodity is in short supply and its price is spiking, it can notify stock-holding limits on it for a specified period.
    • The States act on this notification to specify limits and take steps to ensure that these are adhered to.
    • Anybody trading or dealing in the commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.
    • A State can, however, choose not to impose any restrictions. But once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity.
    • This improves supplies and brings down prices. As not all shopkeepers and traders comply, State agencies conduct raids to get everyone to toe the line and the errant are punished.
    • The excess stocks are auctioned or sold through fair price shops.

    Ex: The Union Government has brought masks and hand-sanitisers under the ECA to make sure that these products, key for preventing the spread of Covid-19 infection, are available to people at the right price and in the right quality.

    What about Food Items?

    • The items covered include rice, wheat, atta, gram dal, arhar dal, moong dal, urad dal, masoor, dal, tea, sugar, salt, Vanaspati, groundnut oil, mustard oil, milk, soya oil, palm oil, sunflower oil, gur, potato, onion and tomato.
    • Based on the deliberations, Government takes various measures from time to time to stabilize prices of essential food items which, inter-alia, include appropriately utilizing trade and fiscal policy instruments like import duty.
    • The govt. can impose stock limits and advise State for effective action against hoarders & black marketers etc. to regulate domestic availability and moderate prices.
    • The government utilizes the buffer of agri-horticultural commodities like pulses, onion, etc. built under Price Stabilization Fund (PSF) to help moderate the volatility in prices.

    Back2Basics

    Price Stabilization Fund (PSF)

    • The PSF was set up in 2014-15 under the Department of Agriculture, Cooperation & Famers Welfare (DAC&FW) to help regulate the price volatility of important agri-horticultural commodities like onion, potatoes and pulses were also added subsequently.
    • Procurement of these commodities will be undertaken directly from farmers or farmers’ organizations at farm gate/mandi and made available at a more reasonable price to the consumers.
    • Losses incurred, if any, in the operations will be shared between the Centre and the States.
    • PSF provides for advancing interest-free loans to State Governments/ UTs and Central agencies to support their working capital and other expenses they might incur on procurement and distribution interventions for such commodities.
    • The scheme provides for maintaining a strategic buffer of the commodities for subsequent calibrated release to moderate price volatility and discourages hoarding and unscrupulous speculation.
    • The PSF is managed centrally by a Price Stabilization Fund Management Committee (PSFMC) which will approve all proposals from State Governments and Central Agencies.
    • The PSF is maintained as a Central Corpus Fund by Small Farmers Agribusiness Consortium (SFAC), a society promoted by the Ministry of Agriculture for linking agriculture to private businesses and investments and technology.

    With inputs from: http://www.arthapedia.in/index.php?title=Price_Stabilisation_Fund_(PSF)

  • Count work, not workers

    Context

    India is one of the few countries in the world where women’s work participation rates have fallen sharply — from 29 per cent in 2004-5 to 22 per cent in 2011-12 and to 17 per cent in 2017-18.

    What could be the possible explanations for the decline?

    • No consensus among economists: Trying to explain whether women are choosing to focus on domestic responsibilities or whether they are pushed out of the workforce has become a minor industry among economists.
    • Can the quality of data be the explanation? Strangely, the one explanation we have not looked at is whether the declining quality of economic statistics may account for this trend.
      • Our pride in the statistical system built by PC Mahalanobis is so great that we find it unimaginable that it could fail to provide us with reliable employment data.
      • However, as challenges to economic statistics have begun to emerge in such diverse areas as GDP data and consumption expenditure, perhaps it is time to consider the unimaginable.
      • Issue of data collection: Is the decline in women’s labour force participation real or is it a function of the way in which employment data are collected?

    Anatomy of the decline in participation rates

    • Driven by rural women: The anatomy of the decline in women’s work participation rates shows that it is driven by rural women.
    • Data of the prime working-age group: In the prime working-age group (25-59)-
      • Urban area data: Urban women’s worker to population ratios (WPR) fell from 28 per cent to 25 per cent between 2004-5 and 2011-12, stagnating at 24 per cent in 2017-18.
      • Rural area data: However, compared to these modest changes, rural women’s WPR declined sharply from 58 per cent to 48 per cent and to 32 per cent over the same period.
    • Among rural women, the largest decline seems to have taken place in women categorised as unpaid family helpers — from 28 per cent in 2004-5 to 12 per cent in 2017-18.
      • This alone accounts for more than half of the decline in women’s WPR. The remaining is largely due to a drop of about 9 percentage points in casual labour.
    • In contrast, women counted as focusing solely on domestic duties increased from 21 per cent to 45 per cent.

    What are the explanations for this massive change?

    • Data collection issue: It is the change in our statistical systems that drives these results.
      • Change of workforce collecting data: The questionnaires through which the National Statistical Office (NSO) collects employment data have not changed, but the statistical workforce has, and the surveys that performed reasonably well in the hands of seasoned interviewers are too complex for poorly trained contract data collectors.
    • How data is collected? The National Sample Surveys (NSS) do not have a script that the interviewer reads out. They have schedules that must be completed. The interviewer is trained in concepts to be investigated and then left to fill the schedules to the best of his or her ability.
      • The NSS increasingly relies on contract investigators hired for short periods, who lack
    • Need for redesigning the surveys: Do we need to return to the days of permanent employees or can we design our surveys to overcome errors committed by relatively inexperienced interviewers?
      • A survey design experiment led by Neerad Deshmukh at the NCAER-National Data Innovation Centre provides an intriguing solution.
      • In this experimental survey, interviewers first asked about the primary and secondary activity status of each household member, mimicking the NSS structure.
      • They then asked a series of simple questions that included ones like, “do you cultivate any land?” If yes, “who in your household works on the farm?”
      • Similar questions were asked about livestock ownership and about people caring for the livestock, ownership of petty business and individuals working in these enterprises.
    • What was the result of survey experiment: The results show that the standard NSS-type questions resulted in a WPR of 28 per cent for rural women in the age group 21-59, whereas the detailed activity listing found a WPR of 42 per cent — for the same women.
      • This is an easily implementable module that does not require specialised knowledge on the part of the interviewer.

    Identifying the sectors from which women are excludes

    • Missing the identification of sector: In our concern with ostensibly declining women’s work participation, we have missed out on identifying sectors from which women are excluded and more importantly, in which women are included.
    • What data for men indicate? For rural men, ages 25-59, between 2004-5 and 2017-18, casual labour declined by about 6 percentage points.
      • However, this decline is counterbalanced by regular salaried work which increased by 4 percentage points.
      • Thus, it seems likely that men are exchanging precarious employment with higher-quality jobs.
    • What data for women indicate? In contrast, women’s casual work has declined by 9 percentage points while their regular salaried work increased by a mere 1 percentage point.
      • Moreover, the usual route to success, gaining formal education, has little impact on women’s ability to obtain paid work.
    • The explanation for the disparity: Rural men with a secondary level of education have options like working as a postman, driver or mechanic — few such opportunities are open to women.
      • It is not surprising that women with secondary education have only half the work participation rate compared to their uneducated sisters.
    • Takeaway: The focus on employment for women needs to be on creating high-quality employment rather than getting preoccupied with declining employment rates.

    Conclusion

    It may be time for us to return to the recommendations of ‘Shramshakti: Report of National Commission on Self Employed Women and Women in the Informal Sector’ and develop our data collection processes from the lived experiences of women and count women’s work rather than women workers. Without this, we run the risks of developing misguided policy responses.

  • Short Selling of Stocks

    The stock exchanges have clarified that the Securities and Exchange Board of India (SEBI) was not considering any proposal regarding a ban on short selling to curb the ongoing volatility and equity sell-off.

    What is Short Selling?

    • Short-selling allows investors to profit from stocks or other securities when they go down in value.
    • In order to do a short sale, an investor has to borrow the stock or security through their brokerage company from someone who owns it.
    • The investor then sells the stock, retaining the cash proceeds.
    • The short-seller hopes that the price will fall over time, providing an opportunity to buy back the stock at a lower price than the original sale price.
    • Any money left over after buying back the stock is profit to the short-seller.

    When does short-selling makes sense?

    • Most investors own stocks, funds, and other investments that they want to see rise in value.
    • Over time, the stock market has generally gone up, albeit with temporary periods of downward movement along the way.
    • For long-term investors, owning stocks has been a much better bet than short-selling the entire stock market.
    • Sometimes, though, you’ll find an investment that you’re convinced will drop in the short term (as in case of COVID 19 outbreak).
    • In those cases, short-selling can be the easiest way to profit from the misfortunes that a company is experiencing.
    • Even though short-selling is more complicated than simply going out and buying a stock, it can allow making money when others are seeing their investment portfolios shrink.

    The risks of short-selling

    • Short-selling can be profitable when one makes the right call, but it carries greater risks than what ordinary stock investors experience.
    • When we buy a stock, the most we can lose is what you pay for it. If the stock goes to zero, we suffer a complete loss, but will never lose more than that.
    • By contrast, if the stock soars, there’s no limit to the profits one can enjoy. With a short sale, however, that dynamic is reversed.

    Example:

    • For instance, say you sell 100 shares short at a price of $10 per share. Your proceeds from the sale will be $1,000.
    • If the stock goes to zero, you’ll get to keep the full $1,000. However, if the stock soars to $100 per share, you’ll have to spend $10,000 to buy the 100 shares back.
    • That will give you a net loss of $9,000 — nine times as much as the initial proceeds from the short sale.