Resuming short-selling
Published: 14 Jan. 2021, 19:52
However, their claims come from complete ignorance of the stock market fundamentals. The Financial Services Commission (FSC) issued a temporary ban on short-selling due to a sudden shock from Covid-19 which led to foreign capital flight. At the time when stocks crashed, institutional investors used their short-selling leverage to sell stocks and make money. In the meantime, losses ballooned for retail investors who could not afford short-selling strategy.
But the ban on short-selling must not continue. Short-selling is a legitimate strategy that allows an investor to borrow stocks from a stockbroker and sell them to make a profit through repurchase when the price rises. But the function of short-selling does not stop there. Institutional players use it to leverage against risks from a volatile market. Without the leverage, institutional investors overseeing billions of dollars of customers’ money lose protection. Institutions have recently been selling stocks heavily during the bull for that reason. Short-selling can earn money in a downward market, but at the same time covers potential losses from fallen stock prices.
If lawmakers are making such a claim while knowing the functional role of short-selling, they are more or less neglecting the overheated market. As short-selling contributes to removing some of the bubbles in the stock market, it can help stabilize the market. That’s why short-selling is commonplace in all major stock markets around the globe.
The FSC must not waver under political pressure, and it must resume short-selling in March as planned. The 10-year U.S. Treasury bond has been rising sharply after the rollout of vaccines. Temper tantrums could renew if fiscal tightening starts. A greater risk can be made if political reasoning dominates economic and financial policies.
with the Korea JoongAng Daily
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