The ethical factor in short selling will remain a contentious issue. As always, it pays to be a discerning investor at all times.
SHORT selling is likely to remain a significant aspect of Bursa Malaysia although detractors say it encourages market manipulation and facilitates profiteering from other investors’ misfortunes. Despite the misgivings, most agree that it is a necessary feature which is common in mature markets.
In general, short selling refers to taking advantage of falling stock prices in order to profit — and is seen as a “natural method” for calming speculators and market manipulators.
In short selling, an investor “borrows” shares from another investor, often a broker, and sells these shares right away in the market.
If the share price depreciates as predicted, the investor can buy the shares at a lower price, return the original shares to his lender and profit from the difference. If the stock price goes up, the investor will have to absorb the often huge losses.
The Securities Commission Malaysia (SC) issued guidelines in December 1995 to govern the practice of securities borrowing and lending (SBL). The latest statement on Bursa’s website says 415 stocks are now short-selling approved securities.
The concept of short selling and whether or not it should be banned surfaced recently when a handful of stocks were suspended over short-selling activities. The stocks which saw sharp price drops included Sarawak Consolidated Industries, Jentayu Sustainable and APB Resource.
The suspension was to prevent extreme market moves amid panic-selling. Trading in the stocks has since been reinstated.
Short-selling is a double-edged sword. If a stock’s price is driven excessively up and manipulated beyond its fundamental value, bears can engage in short selling to counteract the manipulators’ actions.
However, short selling can result in excessive activity that will distort a market’s value.
Liquidity and volume
Done and monitored properly, SBL creates trading liquidity and volume, which is a good thing for Bursa. It is also an interest-bearing activity and counts as good business for investment banks.
Bursa, like its mature counterparts, has the mechanism and rules in place to maintain fair and efficient short selling.
In the future, short selling will likely become even more prevalent and investors will have to adjust to it. In spite of this, short selling will occasionally be suspended when the authorities perceive it might cause a massive loss of confidence and knee-jerk dumping of shares that could cause the market to collapse.
At the moment, SBL may not be very common in Malaysia due to a large number of funds participating rather than retail investors. This is mainly due to the lack of knowledge and exposure in this area.
Interestingly, short selling was suspended in South Korea from last November to June this year, in a move seen to be more political than anything else.
“Many retail investors lost money, leading to divorces and even suicides,” Jung Eui-jung, the head of the Korea Stockholders Alliance was quoted as saying by Nikkei Asia. “This is a social problem. I know short selling has some good functions in theory, but only institutional investors benefit from it in practice. It’s like plunder.”
The ethical factor in short selling will remain a contentious issue.
Supporters will say price discovery and market efficiency are essential. However, detractors will argue that it manipulates share prices, destroys real value and leads to the creation of false news and stories to bring down share prices — all to make money.
As always, it pays to be a discerning investor at all times.
This article first appeared in Star Biz7 weekly edition.
