[Beginner's Guide] LG Energy Solution Stock Collapses Amid 'Gongmaedo' Concerns... What Is Gongmaedo?

On the morning of the 27th, officials attending the LG Energy Solution's KOSPI new listing ceremony held at the Korea Exchange in Yeouido, Seoul, are celebrating the commencement of trading. From the left: Song Kyung-hoon, Deputy General Manager of the Korea Exchange KOSPI Market Division; Ahn Sang-hwan, Chairman of the Korea IR Council; Cho Sang-wook, CEO of Morgan Stanley Seoul Branch; Lim Jae-joon, General Manager of the Korea Exchange KOSPI Market Division; Son Byung-doo, Chairman of the Korea Exchange; Kwon Young-soo, CEO of LG Energy Solution; Lee Chang-sil, CFO of LG Energy Solution; Kim Sung-hyun, CEO of KB Securities; Lee Ki-heon, Executive Vice Chairman of the Listed Companies Association. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Kwon Jaehee] LG Energy Solution, which made a spectacular debut on the stock market, saw its stock price fall below the 400,000 KRW mark on the day it was included in the KOSPI 200, becoming a target of short selling. This is the lowest price since LG Energy Solution was listed on January 27. As a result, individual investors' voices demanding the elimination of short selling are growing louder. What exactly is short selling, and why are individual investors so critical of it?

What is Short Selling?

In short selling, the character "공" (空) means "empty" or "borrowed" in Hanja. Literally, it means selling something that you do not have. Investors borrow stocks they do not own and sell them, aiming to make a profit if the stock price falls.

In other words, it is the exact opposite of the usual trading method where investors buy stocks and then sell them to realize profits or losses.

Since short selling starts with selling, companies with heavy short selling tend to see their stock prices fall regardless of fundamentals such as earnings or corporate value.

[Image source=Yonhap News]

How Can You Make a Profit by Selling Something You Don't Have? The Principle of Short Selling

Let's assume you short sell the stock of company A. To short sell, you first need to borrow shares from an investor who owns company A's stock. For example, if you borrow 100 shares, a securities lending transaction is recorded. This securities lending balance is often considered a leading indicator of short selling activity.

Assuming you sell the borrowed 100 shares at 100,000 KRW each, and then the stock price falls to 70,000 KRW, you can buy back the 100 shares at 70,000 KRW each to return them.

Initially, you earned 10 million KRW by selling 100 shares at 100,000 KRW each. Then, buying back 100 shares at 70,000 KRW costs 7 million KRW. The difference of 3 million KRW is your net profit.

It's a Profit-Making Method, So Why Do Individual Investors Oppose It?

Short selling is a good way to profit when stock prices fall. However, it is difficult for individual investors to participate. Institutional investors and foreigners, who are major players in the Korean stock market, can borrow large amounts of stocks for short selling, but individual investors face high fees for securities lending and difficulty in borrowing stocks. Because of this, short selling is often criticized as a "tilted playing field."

Are There Only Downsides to Short Selling?

Short selling helps discover appropriate corporate values and is positively evaluated for providing liquidity. It can also be used as an investment and risk hedging tool. For this reason, some argue that to be included in the MSCI (Morgan Stanley Capital International) developed market index, the ban on short selling should be fully lifted.

The Samsung Fire & Marine Insurance Case: More Cons Than Pros in Short Selling

Listed companies targeted by short sellers are placed on the "short selling overheated stocks" list. This list includes stocks where the short selling ratio has more than doubled compared to the average of the previous 40 trading days, triggering a one-day suspension of short selling under certain conditions.

A representative case is Samsung Fire & Marine Insurance. In February, Samsung Fire announced its earnings and dividends for the previous year. Earnings fell short of expectations, and the dividend payout ratio decreased compared to the previous year, leading five out of ten securities firms to lower their target price reports.

Short sellers saw this as an opportunity and targeted Samsung Fire simultaneously, with short selling transaction amounts reaching 17.5 billion KRW. This is the largest short selling record since the Korea Exchange began compiling data in 2000.

President-Elect Yoon Suk-yeol Plans to Reform Short Selling?

President-elect Yoon has promised to improve the short selling system. To prevent individual investors from suffering losses due to short selling, he proposed adjusting the collateral ratio for individual investors to be fairer compared to institutions, improving the stock lending system, and introducing a "short selling circuit breaker" that automatically bans short selling when stock price declines are excessive.

He also plans to establish a dedicated short selling monitoring organization to check for naked short selling in real time and to impose criminal penalties equivalent to "stock price manipulation" for illegal short selling.

This content was produced with the assistance of AI translation services.