On my way home from work, a colleague called me over at a café and showed me his phone.
“This stock plunged today. They say it’s because of short selling.”
I tilted my head in confusion.
Short selling?
I had heard the term before, but never fully understood it.
That evening, I went home, opened my laptop, and started researching short selling.
A few days later, I realized just how this trading method works and how it affects the stock market.
Today, I’d like to share what I learned with you.
1. The Basic Mechanics of Short Selling
Short selling is the act of selling shares you don’t actually own—by borrowing them first.
Here’s how it works in simple steps:
- Predict a stock’s price will fall
- Borrow the shares from another investor or a brokerage
- Sell the borrowed shares at the current price
- Wait for the price to drop, then buy the shares back at a lower price
- Return the shares to the lender and keep the difference as profit
For example, suppose a company’s stock is trading at $100 per share, and you expect it to drop.
You borrow 100 shares and sell them for $10,000.
If the price falls to $80, you buy them back for $8,000, return them, and pocket the $2,000 difference.
In short—it’s a way to make a profit when a stock’s price declines.
2. Why Short Selling Exists
Short selling often gets a bad reputation as the “villain” of the stock market, but it serves important functions:
- Price discovery: Helps correct overvalued stock prices
- Liquidity provision: Increases trading volume and market activity
- Hedging tool: Protects long positions from downside risk
In many global markets, short selling is viewed as a kind of “market health check”, helping to pop speculative bubbles and reduce price distortions.
3. The Downsides of Short Selling
From an investor’s point of view, short selling can be an unwelcome force:
- Downward pressure: Heavy short selling can accelerate a stock’s decline
- Uneven playing field: Institutions and foreign investors often have freer access to short selling, while retail investors face more restrictions
- Negative sentiment: The mere news of short selling can hurt market confidence
In South Korea, the system has long been criticized as a “tilted playing field” favoring big players.
4. How Short Selling Can Move Prices
The first time I truly felt the power of short selling was during the early months of COVID-19 in 2020.
As global uncertainty spiked, short selling volumes surged, and stock prices plunged in a matter of weeks.
Eventually, the Korean government temporarily banned short selling altogether.
Ever since then, I’ve made it a habit to monitor short interest ratios closely—especially for the stocks I hold.
If the short interest is high, I approach with extra caution.
5. How to Check Short Interest
If you invest in stocks, you should regularly check short interest data:
- Korea Exchange (KRX) website – lists daily short selling volume and outstanding balances by stock
- Brokerage trading platforms – many provide short interest ratios and chart overlays
A high short interest ratio means a large portion of investors are betting against the stock, which could lead to short-term volatility.
6. Strategies for Dealing with Short Selling
- Strengthen fundamental analysis – make sure the company’s earnings and balance sheet are solid
- Monitor the news – track regulatory changes, market sentiment, and company-specific events
- Diversify – avoid putting too much money into a single stock
- Set stop-loss rules – be prepared to act if short sellers push prices lower
Personally, I now avoid holding heavily shorted stocks for the long term.
Instead, I might trade them short-term or use ETFs to spread the risk.
7. Conclusion – Short Selling Is a Double-Edged Sword
Short selling is a powerful tool for making money when prices fall, but it can also stir fear and instability in the market if misused.
Retail investors need to understand how it works and prepare strategies to handle its impact.
Just like I did—starting with a single conversation with my colleague—you too should be ready to react when short selling makes the headlines.
The market will always swing up and down, but knowledgeable investors are the ones who survive and thrive.
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