What is short selling?

Joonho Jeong

Short selling, which had been banned in Korea for a long time since Corona 19, resumed partially on May 3.

Short selling is an investment strategy in which stocks are borrowed and sold in advance in anticipation of falling stocks. A person who wants a short selling borrows a stock from another person and sells it. When the price actually falls, buys the stock that has fallen and returns it to the borrower. At this time, the person can make as much profit as the stock price has fallen. For example, assuming that the price of a stock has fallen from $50 to $10, a person who borrowed a stock and sold it short in anticipation of a fall will earn a profit of $40.

Short selling has a positive impact on the market in that if the stock price rises excessively, it adjusts it until the price gets to the right place. However, many opposed the resumption of short selling because if foreigners make a large-scale short selling, the stock price will fall excessively and negatively affect the market.

Short selling has been temporarily banned in Korea since March 16, 2020. In March 2020, the KOSPI and KOSDAQ indexes fell rapidly due to the influence of Corona 19. Short selling was banned for a total of six months to prevent excessive falls in stock prices and stabilize the market. Six months later, the ban on short selling was extended for another six months as Corona 19 did not end, followed by a two-month ban on short selling for a total of one year and two months.

Short selling, which will resume partially this time, does not apply to all stocks. A total of 200 stocks made up the KOSPI index and a total of 150 stocks made up the KOSDAQ index were partially subject to short selling. However, most of the stocks subject to short selling were actually subject to short selling because they were selected as the highest market capitalization and the best in each index.

 On May 3, when short selling resumed, strong selling continued as many investor’s worries. A total of 87% of short selling transactions were foreigners, and they invested about 1 trillion won. Due to the partial short selling measures, the KOSPI index fell 0.66 percent and the KOSDAQ index fell 2.20 percent.