You’ve most likely heard the news that Philippine stocks are tumbling recently, but you probably haven’t heard that the Philippine Stock Exchange (PSE) has already secured the approval from the Securities and Exchange Commission to allow short selling in the PSEi starting October 2018.
I will give you an overview of what short-selling is, how it works, and what it means for investors.
How Short Selling Works
In a nutshell, short selling refers to a hedging mechanism in the stock market that allows investors to sell stocks that they do not own yet. Although this is usually associated with speculation, this is an important mechanism that could help attract foreign investors.
I know what you’re thinking, how can you sell a stock if you don’t own it?
Basically, you will have to borrow the underlying securities. So you will sell those borrowed shares of a company which you think will decline in the future, and then earn a profit by buying shares when the price finally got low to replace the ones you borrowed earlier.
What Does This Mean for PSE Investors
If you are participating in the domestic financial markets and your only focus in the past is to target stocks that are expected to increase in price in the future, with short selling, you will now be able to profit from stocks which you expect to decline in the future.
Now that short selling will be introduced in the PSE, investors shouldn’t just ignore stocks that are projected to decline, but rather use that opportunity to make a profit out of it. The key to winning in the financial markets is to learn how to use the long and short positions to gain returns.
Of course, trying to profit from stocks that are about to go down through short selling also involves risk. Hence, it is very important that you maintain self-discipline and always base your investment decisions on data rather than letting yourself be swayed by your emotions. In this way, you will surely be able to succeed.
And another thing, experience is indeed the best teacher. Take it from me! No amount of reading materials or educational courses will surmount to what I’ve learned through experience. However, this also doesn’t mean that it’s okay not to educate yourself. Constantly learning about investing and the markets will help you make wise investment decisions and reach your financial goals.