Susheel Sheth loves playing the contrarian: He buys stocks when others are selling (in a falling market) and sells them when others are adding to their equity portfolios.

But his first love is 'short-selling', he confesses. He makes money by 'going short' on counters that he feels may decline in the near term, specially in counters that are available in the derivatives segment.

His modus operandi is simple: He keeps a close watch on companies that show a sudden spurt in prices, specially following some news reports and then goes short in the Futures & Options market. He has fine-tuned this strategy to extract maximum benefit at a minimum loss.

And when he feels very strongly about certain companies, he borrows the shares from a broker and sells them in the market, hoping to buy back at a lower price. Since the margin lending and borrowing system is not very well used in India, borrowing sometimes becomes a bit of a problem, he says.

Sheth is not the only one using the short-selling strategy to make money. Short-selling allows a person to make profits from a falling stock and is used as a strategy effectively worldwide.

Market sources said that the ability to short sell a stock should not come as a surprise as stock prices are constantly rising and falling.

In fact, investors tend to keep a close tab on short interest: literally a market-sentiment indicator of stock trends.

Short interest indicates trends

The ability to short-sell a stock comes from the fact that stock prices are constantly rising and falling.

In fact, broking houses research companies are not only looking for multi-baggers (shares that increase in value by more than 100%) but also for prime short-selling candidates.

These are typically companies with weaknesses that the market may not have discounted yet or a company that is simply overvalued. They also look at the short interest, which serves as a market-sentiment indicator.

Market entities define short interest as the total number of shares of a particular stock that have been sold short by investors but have not yet been squared off.

This can be expressed as a number or as a percentage. When expressed as a percentage short interest is the number of shorted shares divided by the number of shares outstanding.

Short interest allows investors to gauge overall market sentiment surrounding a particular stock. Typically, a large increase or decrease in a stock's short interest from the previous month can be a very telling indicator of investor sentiment.

In India, where most of the action is in the derivatives segment, players keep a close watch on the open positions and then plan their strategy.

Investors usually tend to take their short-term calls in the cash segment according to the trends in the F&O market. Besides having naked positions -- positions without taken any underlying shares -- they also use it to hedge their positions.

What is short-selling How to make money when the price of a stock is falling? Here's how. It's not magic. It's called 'selling short' and is becoming quite the rage. Short-selling is the opposite of buying stocks -- it entails the selling of shares that the seller does not own in the hope that the price will fall. Market players can borrow the stock from their broker-dealer, sell it and get the proceeds from the sale. How it works: For instance, take the Hindustan Lever Ltd [Get Quote] (HLL) stock. Suppose you analyse it over a period of time and then come to the conclusion that the price of this stock would soon fall rather than rise. Now suppose HLL is trading at Rs 100 per share. What you now do is borrow HLL shares (through your broker) at that price and sell them immediately. When, as you had foreseen, the stock price drops to Rs 90, you can buy back the HLL stocks at this price and pay off your debt. Since you have bought it at a lower price, you pocket the difference, which in this case is Rs 10, making a neat little profit. But there is a catch to this. If the stock price rises, you lose money since you have to buy the stock back at a higher price.