Today, short selling resumes in full… Will foreign capital also flow in?

Valuable Economic Information, Clip Art Korea, ‘(‘, ☞ Subscribe to The Hankyoreh Newsletter H:730., ‘ Search for ‘Hankyoreh h730’.)’,
,
, ‘Short selling, which many individual investors on the domestic stock market had viewed as a major cause of “market disruption,” will fully resume on the 31st. It has been about 5 years since it was halted following the outbreak of the COVID-19 pandemic.’,
,
, ‘Financial authorities explain that they have built infrastructure to prevent illegal activities, such as the controversial “naked short selling” (selling stocks without actually borrowing them), and instructed institutional investors to update their computerized systems and internal control standards. Conditions that differed for individual and institutional investors, such as short selling repayment periods and margin ratios, have been standardized. Moreover, the resumption of short selling is considered necessary for the inclusion of the domestic stock market in the MSCI (Morgan Stanley Capital International) Developed Markets Index, expected to positively impact the inflow of foreign capital into the market. What changes will this revival of short selling bring to individual investors?”,
,
, ― What exactly is short selling?,
,
, ‘“It literally means ‘selling what you don’t have.’ It’s an investment strategy where you borrow stocks you don’t own, sell them first, and then later buy them back to repay the stock loan. The strategy is to sell the borrowed stocks at a high price when a decline in the stock price is expected, then buy them back cheaper when the price actually drops, repay the owner along with the principal and fees, and keep the profit for yourself.”’,
,
, ― I invest in stocks, but I’ve never tried short selling.,
,
, ‘“That’s because short selling is generally utilized by institutional investors like pension funds and asset management companies. In the past, individual investors could also engage in short selling. However, before the recent improvements by financial authorities, the conditions for short selling were different from those for institutions, presenting a barrier to entry for individuals. There was also often a shortage of stocks available to borrow for individual investors, as institutions borrowed and lent among themselves.”’,
,
, ― What are the advantages and disadvantages of short selling?,
,
, ‘“Short selling increases liquidity as the volume of stocks sold increases because they are borrowed. It can also have the positive effect of removing bubbles from overvalued stocks. Typically, investors can easily incur losses during a bearish market, but short selling provides an opportunity to turn the tables. It also increases the inflow of foreign and institutional investors.’,
,
, ‘However, many individual investors unfamiliar with short selling are concerned that excessive short selling could cause stock prices to plummet. This is because short selling is primarily done by foreign and institutional investors, and if stock prices are corrected, individual investors who expect prices to rise could be at a disadvantage.”’,
,
, ― What issues led to the full ban on short selling for five years in the country?,
,
, “Individual investors have long suspected that institutions and foreigners habitually engage in illegal naked short selling. In reality, domestic securities companies or the Korea Exchange have lacked the means to monitor ‘naked orders’ by foreign or institutional investors in real time.’,
,
, ‘The borrowing conditions for individuals were less favorable compared to institutions. For instance, the maximum repayment period for institutions was 12 months, while individuals were limited to 30 days. The margin ratio was typically 105% for institutions, but often 140-150% for individuals. Although applying different credit rates to individuals, institutions, and foreigners is deemed unavoidable, individual investors have remained discontented.’,
,
, ‘Despite the purported aim of system improvement, the short selling ban in November 2023 was criticized as a populist measure by the ruling party, the president’s office, and the government ahead of the April election. Short selling is a legitimate investment technique permitted in most countries worldwide. The real responsibility of authorities is not banning short selling but detecting and penalizing illegal actions, such as insider trading.’,
,
, ‘In fact, the comprehensive investigation launched by financial authorities in November 2023 only uncovered about 210 billion won worth of illegal short selling, a minor fraction of the over 150 trillion won total accumulated trading value.”’,
,
, ― How will things change moving forward?,
,
, ‘“Starting on the 31st, short selling conditions for both individuals and institutions will be standardized with a 90-day repayment period (extendable to 12 months) and a margin ratio of 105%. Financial authorities plan to temporarily expand the designation system for overheated short-selling stocks until the end of May to prepare for initial volatility.’,
,
, ‘Improvements such as △short-selling balance disclosures △designation of overheated stocks (a system to limit short selling on stocks with a sudden increase in short sales the following trading day) and △provision of information by a central monitoring system (NSDS, which auto-checks whether stock borrowing has occurred for short selling) will provide more accessible information to investors, thanks to financial authorities’ reforms.’,
,
, ‘Nonetheless, individual investors must recognize that the re-initiation of short selling after a long prohibition could increase downward pressure on stocks popular with short sellers. They should also be cautious about stocks with large or recently increased borrowing balances.”’,
,
,