Tuesday, March 31, 2020
Short Sellers Hit Hard by Surprise Rally in KOSPI
A Severe Blow to Short Sellers
Short Sellers Hit Hard by Surprise Rally in KOSPI
  • By Yoon Young-sil
  • February 11, 2019, 11:06
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Short sellers are hit hard this year as the South Korean stock market showed a “surprise rally.” 

Short sellers are hit hard by a “surprise rally” in the South Korean stock market this year. They are making a huge loss this year, unlike last year when they made a big gain from the slump in stock prices.

The prices of 14 out of the 20 most shorted stocks in the KOSPI and KOSDAQ markets rose higher than the average short selling prices from Jan. 1 to Feb. 8, according to Korea Exchange (KRX) on Feb. 10. Most predictions of short sellers, who sold borrowed securities in expectation of a drop in stock prices, were wrong.

When stock prices go higher than the average price of short selling, short sellers suffer a loss. Short selling is the act of selling a security that the seller has borrowed, in the hope that it will decrease in value, and paying back the security by buying it when its price has dropped. A short seller profits if a security's price declines. It encourages a fall in stock prices and only institutional and foreign investors can practically make short selling transactions. Accordingly, an increasing number of retail investors have been calling for the abolishment of short selling.

Short sellers are struggling this year, unlike last year when they made a huge profit from the bearish market. Last year, they posted an average return rate of 20.52 percent from short selling of the top 788 stocks in terms of market cap in the domestic stock market.

In particular, short sellers targeted mainly semiconductor stocks, such as Samsung Electronics Co. and SK Hynix Inc., this year again but the efforts came to nothing as the price of semiconductor stocks rebounded by a great deal this year. The prices of Samsung Electronics and SK Hynix shares increased by 15.6 percent and 21.3 percent, respectively, this year as investors believed that the semiconductor market would recover.

Samsung Electronics ranked first in terms of the amount of short selling with 15,625,828 shares over the same period. The closing price of its stock stood at 44,800 won (US$39.86) on Feb. 8, while the average short selling price was 42,849 won (US$38.12). A short seller would have suffered a loss of 1,951 won (US$1.74) per share if they had borrowed Samsung Electronics’ securities and sold them at the average short selling price and then paid back after purchasing them at the closing price on Feb. 8.

SK Hynix came in second with 10,469,435 shares shorted, accounting for 11.41 percent of the total short selling volume. The average short selling price was 67,468 won (US$60.02), while the recent closing price stood at 73,500 won (US$65.39). The price difference was 8.94 percent. Therefore, short sellers are believed to have suffered a great loss.

In addition, the price difference for Woongjin Thinkbig Co. shares reached 12.48 percent, the highest among the 20 most shorted stocks. The average short selling price of Woongjin Thinkbig shares stood at 2,796 won (US$2.49) but the recent closing price was 3,145 won (US$2.80). Unlike the expectations for a fall in stock price, Woongjin Thinkbig shares showed a rapid rise amid high expectations for the release of education services using artificial intelligence (AI). The stock price of Woongjin Thinkbig surged as much as 19.4 percent this year.