[Beginner's Guide] The Tilted Playing Field 'Gongmaedo'... Who Is the Target?

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[Asia Economy Reporter Kwon Jaehee] 'Targeted by short-selling forces, causing stock price plunge'

You have probably seen this often in articles related to stocks.

Recently, secondary battery-related stocks have also become targets of short selling.

Let's find out what short selling is that causes stock prices to plunge and why individual investors are so critical of it.

What is Short Selling?

The '공 (空)' in short selling means 'empty' or 'borrow' in Hanja (Chinese characters).

As you can infer, short selling means 'selling what you do not have'.

It involves borrowing stocks you do not own and selling them, so if the stock price falls, you can make a large profit.

Generally, to sell stocks, you must first buy them, but short selling starts with selling, so stocks with heavy short selling tend to fall in price regardless of fundamentals such as corporate value or performance.

You might wonder: How can you make a profit by borrowing and selling something you do not have?

What exactly is the principle behind short selling?

Let's assume you short sell the stock of company A.

As mentioned earlier, short selling means borrowing stocks you do not own and selling them, right?

To short sell, you first need to borrow stocks from an investor who owns company A's shares.

For example, if you borrow 100 shares, a securities lending transaction is recorded for those 100 shares.

A securities lending transaction is a record of borrowing stocks, and the securities lending balance is commonly used as a leading indicator of short selling.

Suppose you sold those 100 shares of company A at 100,000 KRW per share.

After short selling, if the stock price falls and company A's stock price drops to 70,000 KRW per share,

the short sellers buy back 100 shares at 70,000 KRW to return the borrowed shares and earn the difference as profit.

In other words, they profit by selling high and buying low, earning the difference.

After hearing this, you might think, "Oh, then I can also make profits this way?"

But why do individual investors oppose short selling?

Short selling is easy for institutional investors or foreigners, but for individual investors, the high securities lending fees and the difficulty of borrowing stocks make it hard.

This is why the criticism of a 'tilted playing field' arises.

Short Selling Focused on Secondary Batteries

So, what stocks have recently become targets of short selling forces?

According to the Korea Exchange, as of February 27, the stock with the highest short selling balance in the KOSPI market was LG Energy Solution (743.9 billion KRW).

Samsung Electronics followed in second place with 605.9 billion KRW.

You might think that stocks with high market capitalization are the main targets of short selling forces.

However, surprisingly, HMM ranked third with 468.4 billion KRW.

In the KOSDAQ market, among the top 10 stocks by short selling balance, four were secondary battery-related stocks.

EcoPro BM ranked first with 468.3 billion KRW, L&F second with 298.4 billion KRW, and HLB third with 91.3 billion KRW.

With the top three all being secondary battery-related stocks, it is clear that recently short selling forces have targeted secondary battery-related stocks.

Can Short Sellers Also Suffer Losses?

Although short sellers can easily profit by exploiting the 'tilted playing field', they can also suffer losses.

Short selling bets on stock price declines, but conversely, if the stock price rises, losses occur.

This is the case with secondary battery-related stocks recently.

Since the end of last year, concerns about slowing electric vehicle demand led to a prevailing forecast that secondary battery-related stocks would decline.

Moreover, the fact that secondary battery-related stocks had risen sharply also supported the bearish outlook.

However, contrary to expectations, the upward trend has continued this year.

Therefore, losses for short sellers have become inevitable.

To cover losses, short sellers reluctantly engaged in a 'short squeeze', which further pushed up the prices of secondary battery-related stocks.

A short squeeze refers to a situation where investors who short sold expecting a price drop buy stocks to prevent additional losses due to rising prices.

This further drives up stock prices.

Dear Joorini readers,

After studying industries and stocks diligently, you might feel discouraged when stock prices surge or plunge due to short selling regardless of fundamentals.

You might wonder, "What's the point of studying so much?"

You may also feel like a victim of manipulations by powerful forces.

However, recently individual investors have emerged as major players in our stock market, and political circles are making efforts to correct market-disrupting behaviors.

Short selling was also included in the pledges of presidential candidates in the last election.

Since our capital market history is not long, it will take some time to establish fair order, but if individual investors continuously monitor the market and raise their voices, improvements will surely come.

We support your wise investments today as well, and conclude this article.

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This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and difficult economic stories in an easy and friendly way so that stock beginners can understand. Click subscribe to receive articles for free.

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