1. Short selling is a popular trading method in the market
Short selling can be viewed from many different angles such as:
– Is trading activities on the market;
– Method of liquidation of assets;
– Financial products help diversify portfolios, reduce risks when the market declines;
– As a tool to attract foreign investment.
Many countries around the world consider short selling a legal transaction, including Vietnam. Circular 120/2020/TT-BTC regulates short selling as follows:
“Secured short sale transaction is the sale of securities borrowed on the securities lending and borrowing system of the Vietnam Securities Depository and Clearing Corporation. The seller is then obligated to buy back those securities to repay the loan.”
2. Nature of short sale transaction
Short selling is an activity in which the selling price at the time of transaction is lower than the normal price. Lenders proactively approve, compared to the traditional method of confiscating and reselling at a low price. The collateral for the transaction can be cash, deposits, escrow accounts, corporate equity, etc. The lenders are usually banks or other financial institutions.
Contrary to the normal profit/loss principle, the short seller will profit if the security falls because the seller will then buy the security back at a lower price. Conversely, a short seller will lose if the security’s price rises because the seller will buy back the security at a higher price than it was previously purchased.
Short sale transactions must be transactions with collateral. This regulation will eliminate cases of insider trading, fraud, and market manipulation.
3. The risks of short trading
Short selling risks can come from reasons such as:
– The borrowed shares are forfeited and the short seller may be forced to terminate the position early;
– Stock prices rise, forcing short sellers to increase collateral;
– Borrowing fee may increase before closing short position.
Short selling has a very high risk that can happen in the future. But short selling in times of crisis will bring profits to investors who know how to choose the right time to participate. The risk of short selling can worry investors, but can help reduce speculative trading in the stock market.
(Refer to Investment Newspaper dated 5/5/2023)
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