PSE Got Approved for Short Selling

Value Investing Philippines is excited to announce that we will soon be able to short sell. The Philippine stock market is one of the most low tech when in comes to offering services to investors. While most of our neighbouring countries offering advanced derivatives, we are still a long way behind, only being able to invest by buying (LONG position) stocks.

But we have a new development in the capital markets. We are soon be able to Short Sell a stock.

What is Short Selling?

Its just the opposite of buying. When you buy a stock, you are betting that the stock would rise. And when it rise, you will make money. Easy enough right? But what happen if you want to make money if the stock fall? That’s short selling.

Implementing a short selling order is complicated. Its done in the background where the investor does not have to worry about. The only thing you have to worry about is, is it the right trade? Once you open a position, a short position in a stock, you will make money when it goes down. BUT! you will lose money if the stock goes up in price. That’s the complete opposite of buying or LONG position.

How does short selling actually gets implemented?

Imagine you have a friend that collects rare coins. You know that rare coin is sold on the internet for P1,000. Here is how short selling is. Predicting the future that you know that the price of the rare coin will go down, you borrow that rare coin from your friend, promising to give it back a few months later (a date you think the rare coin will go down).

After you borrow that rare coin, you immediately sell that coin on the internet for P1,000. You now have P1,000 in your pocket and you now lost the coin. Now, after a few months, you look into the internet once again and the rare coin is now down P500. Just as you predicted that it will go down. Now that you have promised your friend to give back the rare coin, you purchased the coin from the internet for P500 and returned the coin to your friend. Pocketing the extra P500.

That’s how Short Selling is. Its a complex process of borrowing and buying and selling. Which you don’t have to worry about because the system already does that for you behind the scenes. All you have to worry about is your investments.

This video explains it very well:

Potential Use of Short Selling

There are lots of cases in the Philippine stock market where its obvious that its a pump and dump scheme. Stocks soaring without any reason and going down immediately, stealing money from uneducated investors. You can actually play a moral force in that. By short selling the soaring stock, you can make money when the inevitable stock does fall.

Leave a Reply

Your email address will not be published. Required fields are marked *