10Jul Update: PSE target launch for short selling is October, and limited to index names for now. Click here for more info.
Short selling will be available in PSE soon!
Last June 22, the Philippine Stock Exchange (PSE) issued circular 2018-0035 announcing that the SEC already approved its Short Selling Guidelines.
Stock market participants, especially the veterans in trading, got excited with this news because they have been waiting, or perhaps clamoring is the better word, for short-selling to be available in our stock exchange. And now, we’re a step closer to having such feature in our market.
WHAT IS SHORT SELLING?
For the longest time, PSE participants have been used to “buy low, sell high.” We buy in the expectation that the share prices will increase in the future. This strategy is also known as “being long in the market.”
On the other hand, being short in the market, or short selling can be crudely defined as “selling high, buying low.” Huh? What did you say? Dafuq did I just read?
Traders do this if they expect that share prices will go down, as such they aim to profit by shorting the market. A little help from Investopedia can help us understand short selling better:
- If Juan believes that share prices of stock $ABC will go down, he can short such stock and take advantage of the price decline.
- For example, $ABC is now trading at PHP100. Juan then borrows 1,000 shares and sells the 1,000 shares to the open market (worth PHP100,000 excluding fees and charges).
- Technically, Juan is “short” of 1,000 $ABC shares since he sold something he did not own, something he just borrowed. But he got PHP100,000 in “revenue”.
- There are deposit and margin requirements to ensure that Juan who borrows has the actual capacity to repay /repurchase the shares even if the trade goes against his bet.
- A few days after, $ABC shares indeed go down to PHP75 each. Juan then decides to close his short position by buying 1,000 $ABC shares in the open market for worth PHP75,000 (excluding fees and charges). He then returns the 1,000 shares he borrowed and made a neat PHP25,000 (33%) in profits, given that his cost is PHP75,000 and profit is PHP25,000.
- However, if instead of a price drop, $ABC shares instead surged to PHP125 per share. If Juan decides or is forced to cut losses on this trade (since he feels $ABC shares will go up even more), then he’ll have to buy 1,000 shares at such price (worth PHP125,000) and he ends up losing PHP25,000 in the trade.
WE HAVE TO LEVEL UP
If before, profiting in the market means buying low and selling high, now Juan can also profit from borrowing and selling high, buying low. Assuming of course you are on the right side of the market.
If Juan is already having a hard time timing his trades on when to buy or sell a stock that he thinks will go up, then being able to profit when a stock goes down can either be a boon or a bane. Again, as long as Juan is on the right side of the trade. If right now, we’re good in buying stocks (which we think will go up) but it ends up going down (ipit!), then maybe we can use such skills in shorting the stock instead. LOL.
Developed markets have short selling in their stock markets, so I suppose this is the way to go for our country as well. Forex trading usually has short-selling too.
Anyway, PSE will release more communications and investor education regarding this so stay posted. This will probably take time as our brokers will also have to prepare their systems as well. But for us participants, time to level up our game.
You may view a copy of such PSE circular and guidelines by clicking here.
Click here to read more on short selling in investopedia.
Likewise, here is an informative video from YouTube.
Speaking of PSE, below is some charting of the index. What’s happening to our market?!?
- Obviously the index remains very weak, even fell below 7000 last Friday. The index is below ichimoku lines, below the moving averages, below the cloud which is red.
- Nonetheless, was that a hammer at the close of market last Friday?
- The candle wick even touched a crucial fibonacci level at 161.8% (6937) before bouncing to close above 7000. (Click here to read more on fibonacci retracements.)
- This should be a good foreboding if we see a consolidation in this area to mark a potential bottom. Or a retest of these levels.
- RSI is also at previous support levels.
- Nonetheless, caveat emptor every Juan!
- It was a rough week last week, as shown by a long red candle. After trying to consolidate in 61.8% levels the previous 8 weeks, last week saw a fall below 7500 and straight to 7000 levels
- Market ended above the low for the week, settling at 78.6%. We’ll see this coming week if this level holds.
- Plotting fibonacci retracements from the low of 2008 (10 years!) shows that the market is now at 23.6% retracement.
- It is also at the upper bound of the ichimoku cloud. Question is, can it act as support? Word of caution, the monthly candle is not yet finished. 🙂
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*Photo and video: Credits to Owners