On the 31st of last month, short selling resumed in the Korean stock market. On the first day, the transaction amount for short selling reached 1.7 trillion won. Of this, 90% was foreign trading, with the rest being 170.7 billion won by institutions and 14.2 billion won by individuals. Although the participation of individuals was a small percentage of less than 1%, the news that individuals were participating in short selling was interesting.
When I searched for 'how to short sell' in a popular stock cafe, I found several posts titled 'Can individuals short sell?' The responses all converged on 'You can, but you shouldn't.' A comment stood out: 'There are reasons why individual investors don’t short sell.' When told not to, people tend to want to try it more. I decided to participate in short selling.
Short selling literally means selling stocks that do not exist. It is an investment strategy where one borrows stocks expected to fall in price, sells them, and later buys them back at a lower price to repay, earning a profit from the price difference. In simple terms, it is betting on a decline in stock prices.
To short sell, individuals must first complete online training and participate in simulated transactions. They can do this by taking the 'Individual Short Selling Preliminary Mandatory Education (New)' course on the Korea Financial Investment Association's training institute website. The training lasts one hour and costs 4,000 won. During the previous short selling period, it was 3,000 won for 30 minutes, so investors who attended that training do not need to retake it.
If you have completed the training, you can now participate in the simulated transaction. However, I encountered a hurdle. After reading reviews from the previous short selling period, I accessed the simulated trading system on the Korea Exchange (KRX) website but could not find the membership registration button at all. After calling the relevant department, I confirmed that since last year, securities firms have changed to provide their own simulated trading services.
I moved to the short selling simulated trading page as guided on the website of my primary securities firm, Samsung Securities. There, I registered and created a virtual account. I also downloaded the simulated trading system. Now, I just need to conduct a simulated transaction for one hour within this system.
As soon as I accessed the system, a warning message appeared saying, 'You could lose your entire investment principal when short selling.' For example, let’s assume I borrowed 10 million won worth of stocks as collateral for an investment. If I borrow stocks from a company expected to decline in price and sell them at their lower limit on the same day, and that stock price rises to its upper limit the next day, the loss would exceed the investment principal.
Additionally, if the collateral maintenance ratio falls below a certain level due to the price fluctuations of the sold stock, additional funds must be deposited, and failure to comply may result in forced liquidation.
The simulated trading window resembles the home trading system (HTS) of securities firms. The virtual account had a capital of 30 million won. The available quantity for short selling was 100,000 shares. I practiced short selling by selling the borrowed stocks in the short selling new sale tab and then buying them back in the buy repayment tab. If there is no activity for 10 minutes, I am forcibly logged out, so I need to repeat it several times.
When I tried to sell stocks at a price lower than the current price, a notification popped up saying, 'Uptick rule order violation,' and the transaction was not executed. The Uptick Rule is a regulation that prohibits submitting sell orders below the previous price during short selling. If the current price of the stock is 50,000 won, it means that the short selling bid must be set above 50,100 won. This is a measure to prevent stock price declines due to short selling.
The simulated trading system is divided into two sessions: Session 1 (weekdays from 9 a.m. to 3:30 p.m.) and Session 2 (weekdays from 4 p.m. to 10:30 p.m.). I conducted simulated trading, including during the maintenance time (from 3:30 p.m. to 4 p.m.), but no transactions were executed during that time. However, it was still recognized as simulated trading time.
After finishing the simulated trading, I applied to use the loan transaction with the securities firm. I used the mobile trading system (MTS) called mPOP from Samsung Securities. I searched 'short selling application' in the mPOP search bar and entered the 14-digit training completion number I received and the authentication key noted on the simulation completion certificate. Then, I needed to agree to several terms and conditions.
The terms of use highlighted in red the new regulations that changed from this year according to the short selling system improvement plan. First, both individuals and institutions must repay borrowed stocks within 90 days. Even if an extension is made, it can only be for a maximum of 12 months. Previously, institutions had virtually no limitations on the repayment period, while individuals had a 90-day limit, which raised many concerns about fairness.
The collateral ratio required when borrowing stocks has also become the same. The collateral ratio for individual short selling will be unified from the previous 120% to 105%, the ratio applied to institutions and foreigners. The collateral ratio refers to the percentage of collateral that must be held relative to the amount of stocks borrowed during short selling. This means that if you borrow stocks worth 1 million won for short selling, you can only need to hold 1.05 million won in cash.
Having familiarized myself with all the guidelines, I decided to go into actual trading. I searched for 'short selling' in the mPOP search bar to enter the trading window. It was almost identical to the regular order entry window, but the available quantity for short selling was displayed in the middle. New investors in short selling can trade up to a limit of 30 million won. In the case of Samsung Securities, an interest rate of 4.5% or 6% annually is applied by stock, but it was not immediately clear just from looking at the trading window. I had to check the interest rate separately under the 'available short selling stocks' tab.
I chose POSCO FUTURE M, which was considered a focus target for short selling, as my first investment. While I complied with the Uptick Rule by offering a bid higher than the current price, my orders were continuously rejected. Upon checking, the number of 'available short selling' stocks was 0. This means there were no stocks left that I could borrow for short selling. On the 31st of last month, POSCO FUTURE M recorded the 7th largest amount of short selling (38.2 billion won).
Unfortunately, I changed my stock to ECOPRO BM, which still had available short selling quantities. When I offered a bid 100 won higher than the current price, the short selling order was placed. However, it seemed there were many sellers but no buyers, as my order was not executed for over 30 minutes.
In the meantime, the available quantity for short selling had decreased by 110 shares, leaving only 39 shares remaining. Based on the stock price of 96,000 won at the time, the amount an individual could short sell would be approximately 3.74 million won. It seemed challenging to meet all the demand with that amount.
Most of the short selling volumes provided by each securities firm are borrowed from Korea Securities Finance Corporation. Korea Securities Finance Corporation collects stocks deposited as collateral for credit loans by investors and accumulates them as short selling volumes. A representative from Korea Securities Finance Corporation explained, 'The available lending volume for short selling increases when investors return the stocks or when the collateral stocks increase.' The amount of short selling for POSCO FUTURE M, which had been zero until the regular session, had risen to over 900 shares in the after-market.
That day, I short sold one share of ECOPRO BM and made a profit of 300 won. However, even if I repaid the borrowed stocks on the same day, a day's interest would be charged. The interest rate applicable to this stock is 6% annually, which means the daily interest rate would be approximately 0.017%.
The final profit from short selling will be the amount after deducting the selling proceeds usage fees rate (approximately 0.1% annually for the short sale proceeds).
As a result of directly trying short selling, contrary to my worries, the participation itself was not difficult. However, it was challenging to continuously track stock price movements to avoid capital loss and to secure the desired amount of short selling volumes at the right time. There was also anxiety about when a forced liquidation might occur. I thought I would have to weigh that against other investment strategies that could have a similar effect, such as inverse exchange-traded funds (ETFs) and put options.