Short selling helps bolster trading in the domestic market. This is what the Philippine Stock Exchange (PSE) has been wanting to push since 2018. But will it finally happen?

Investopedia defines the stock market as a component of a free-market economy that allows companies to raise money by offering stock shares and corporate bonds to investors. These are run by organizations that provide and ensure a fair, efficient, transparent, and orderly market for the buying and selling of these securities.

In the Philippine setting, the Philippine Stock Exchange (PSE) is the governing body in charge of making decisions about what the local stock market will or will not be doing. This includes initiating strategies like short selling.

What is Short Selling? 

By definition, short selling is an advanced investment or trading strategy usually undertaken by experienced traders and investors. Short selling occurs when a trader borrows shares from a broker and immediately sells them with the expectation that the share price will fall shortly after. If it does, traders can buy back their shares at a lower price, return them to the broker, and keep the price difference as profit. 

The reason behind its importance? It improves the efficiency of security prices, increases liquidity, and positively impacts corporate governance. Through this program, short sellers can earn when the stock prices drop rather than when they increase. 

The PSE has already planned on implementing short selling since 2018—however, it didn’t push through. It was also said that the PSE would release its short selling guidelines by the first quarter of 2021 but it also didn’t happen. 

The PSE’s Plans for Short Selling

After several years of trying to launch short-selling in the country to attract foreign money, this decision which used to raise several concerns is now set to get its green light. That said, the PSE will be able to follow in the footsteps of the other more developed financial markets in Asia—including Singapore, Malaysia, Indonesia, Thailand, and Hong Kong. 

“For the PSE’s upcoming initiatives, PSE is set to launch short selling within the month. More specifically, we targeted October 23, given that all regulatory approvals were received for this initiative,” PSE president Ramon Monzon said during the Forum on Legislative Reforms for the Philippine Capital Market. 

As this will be the first time that the PSE will do it, only PSE index stocks, mid-cap index stocks, dividend yield index stocks, and exchange-traded funds will be considered eligible securities for shorting. 

Moreover, short selling can only take place if the number of shares has been sold short and their outstanding is less than or equal to 10% of its total shares (short interest ratio). If the security exceeds the 10% limit, it can’t be shorted until it falls below the threshold. 

For the launch of short selling, the PSE will prepare its market participants by hosting several webinars. 

By understanding short selling and what it can do to impact the local stock market, business owners and investors can easily understand how they can earn from PSE’s short selling initiative. More so, it will also be more helpful for both parties to catch up with investing trends as they catch up with how international stock markets perform.