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Short selling involves borrowing a stock, selling it at the current price, and hoping its price drops. When the price falls, the investor buys it back at a lower cost, returns the borrowed stock, and profits from the difference.
Think of it as a strategy of someone who’s capitalizing on a bearish market outlook.
The PSE said short selling allows investors to communicate their view on the price of an asset, lowers overpriced securities by encouraging better price discovery, generates liquidity, and manages risks especially for hedging long positions.
However, if the price rises, the investor faces a loss.
The price of a shorted stock can keep rising, exposing the short seller to potentially infinite losses. This is exactly what happened to GameStop and hedge funds in the United States in 2021.
A sudden and sharp increase in the price of a shorted stock can also force short sellers to buy shares to cover their position, driving the price even higher. This is what’s called a “short squeeze.”
Moreover, short selling requires borrowing stocks and using margin, which can incur fees, interest, and margin calls.
In general, investment houses agree that shorting is riskier compared to buying stocks.
The PSE, however, is limiting short selling to stocks that belong to the PSE index, mid-cap index, dividend yield index, and exchange traded funds.
Short selling comes at a time when trading participation at the PSE is low and stocks are trading at cheap valuations. This means that potential gains from shorting stocks might not be huge for most investors.
The PSEi on Friday, November 3, closed at 5,794, picking up 11 points or 0.2%. This, however, is the third straight day that the PSEi traded below 6,000. But analysts noted that the PSEi is oversold and is showing an attempt to rally just off the 6,000-level support.
Year-to-date, the PSEi lost 9.2% in value and is among the weakest in Asia.
Investors are still betting on the US markets amid higher interest rates and a clamor for generative artificial intelligence, with the S&P 500 and Nasdaq gaining 12.5% and 27%, respectively. – Rappler.com
Want to invest in the stock market? Here are some tips from Rappler’s resident stock market analyst Den Somera: