From the flash delisting of Lucky Coffee last year to the recent surrender of Wall Street elites who shorted their arms in a game station game, behind this major news, the protagonists are well-known shorting agencies such as Muddy Waters, Citron, and Killer Whale. What is the difference between shorting US stocks and Hong Kong stocks? In addition to institutional shorting of Hong Kong stocks, can individual investors “show off”? What is the difference between shorting Hong Kong stocks and US stocks? How exactly should I go about shorting Hong Kong stocks? Without further ado, let's talk about shorting the Hong Kong stock market in this issue.
What is short trading
Shorting transactions take advantage of falling securities prices to profit. Investors first borrow a large number of securities and sell them at a high price in the market. After future stock prices fall, they then buy back the securities at a lower price and return the borrowed securities, and then profit from them.
The special mechanism of selling first and then buying in short trading means being bearish on the long-term trend of trading stocks or securities. Short-selling traders can only benefit when trading securities are in line with bearish expectations.
Investors will also use short sales to preserve their stock prices. The specific operation method is to sell shares held by shorting to prevent stock prices from falling. If the stock price does fall at that time, then the establishment of a short sale transaction enables investors to profit from it and make up for losses caused by falling stock prices; if it coincides with an increase in stock prices, then the rising profit of holding stocks and the loss of short selling can also make up for each other.
Shorting transactions for Hong Kong stocks and US stocks
In the Hong Kong capital market, not all Hong Kong stocks can be shorted, and only designated securities published on the Hong Kong Stock Exchange website that can be short-sold can be short-sold can be traded for short. Designated securities that can be short-sold are reviewed and adjusted on a quarterly basis.
There is also a special aspect of shorting transactions in Hong Kong. Hong Kong law prohibits anyone from selling shares they do not own, unless he has at the time of sale, or has an honest and reasonable belief that he has an immediate and unconditional right to transfer the relevant shares to his personal name.
There are various shorting methods in the US stock market, including directly shorting individual stocks, trading options corresponding to stocks to achieve shorting, buying options corresponding to indices, shorting US stock ETFs, and shorting through futures.
Five rules you need to know when shorting
Margin account requirements
Account types are generally divided into cash accounts and margin accounts. Among them, margin accounts are actually funded by brokerage firms for investors, and investors bear the profits and losses of the investment (that is, with leverage). The most basic requirement for short selling on margin accounts. Cash accounts cannot be short sold.
Naked short selling is prohibited
The Hong Kong stock market prohibits “naked short selling” and only accepts guaranteed short selling. “Naked short selling” is mainly because “naked short selling” may inflate the number of securities for a short period of time, causing great interference with market stability.
In guaranteed short selling, shorting traders need to borrow securities (lenders) from brokerage firms and other institutions to short sell. This process is also referred to as securities lending in the A-share market. When the stock price rises and the short selling side faces losses, the lender will face exposure to credit risk and default. At this time, the lender will require the short seller to supplement the security deposit.
Price limits
Shorting US stocks is generally not allowed to be sold. The original definition of fairy stocks is a small-cap stock with a low stock price and low market value, but since low is a relative concept that is difficult to determine, most brokerage firms uniformly stipulate that investors are not allowed to short sell stocks with a stock price of 5 US dollars or less.
Hong Kong stocks have a rule restricting price increases from short selling, that is, they can only be short sold at a price not lower than the best selling price at the time to prevent short selling from suppressing prices when stock prices fall. This rule is mainly aimed at limiting the suppression of prices by short selling transactions when prices fall. Currently, among securities that can be shorted, with the exception of ETFs, the rest of the securities are still subject to the short selling price increase rule.
Fee/interest payments
In the short selling process, investors are required to: (1) pay interest to the brokerage firm based on the corresponding value of the loaned stock; (2) return to the brokerage firm the interest dividends that the stock should have received during the short sale process; and (3) pay other transaction fees. As long as it is during the short sale period, investors can pay the above three fees or interest. Theoretically, there is no return period.
Limit the scope of short selling
The Hong Kong stock market cannot be shorted at will. Instead, it is necessary to select short bids from the shorting list published by the Hong Kong Stock Exchange. You can also see from the list below that the list of securities sold for short will be adjusted every certain period of time.
Attachment: You can leave the list empty
There are conditions for shorting; you must choose to be “big, concentrated, and fast”
Choosing a company with a large market capitalization
First, choose big, not small. Choosing a large company can greatly reduce liquidity risk and risk of shorting. Shorting large companies, especially leading companies in the industry, once successful, also has a high level of market attention. Shorting one can also cause the stock prices of other concept companies to fluctuate, playing the role of “killing two birds with one stone.”
The size mentioned here actually refers to market value. For details, please refer to stocks with a market value of not less than HK$3 billion and a turnover rate of not less than 60% in the past 12 months. If it is a new stock that has been listed for less than 60 trading days, select stocks with a market value of not less than HK$20 billion and a total trading volume of not less than HK$500 million for the 20 consecutive trading days beginning on the second day of listing.
Choosing a company with concentrated equity
Second, choose a private enterprise where the majority shareholders' equity is concentrated. After all, the status of a state-owned enterprise is something few people can leverage and afford to spend. The excessive share of shares held by the majority shareholders reduces the liquidity of stocks, makes it easier for the majority shareholders of private enterprises to control stock prices, and there is a possibility that stock prices are inflated. Although this type of stock may have fewer chips that can be shorted in the market, once it is shorted, the short-term volatility of the stock price may be amplified. In Hong Kong stock companies that have been shorted in the past few years, the majority shareholders hold more than 50% of the shares, or even close to 70-80%, and the nature of the company is mainly a private enterprise. For example, the shareholding ratio of the largest shareholder of Dali Foods is as high as 85%.
The share of short selling transactions that choose to short sell in the short term is rising faster
Finally, choose a company whose share of short selling transactions is increasing rapidly in the short term. The larger the share of short selling transactions, the more clearly pessimistic the market is about them. In addition to referring to the share of sales transactions, it is also possible to read some technical indicators from brokers' research reports, such as ratings such as “selling” and “target price downgrade.” It can be concluded that in addition to the company's fundamentals being unfavorable, the market's short selling sentiment on it is also an important basis for brokerage ratings.
Practical example of securities lending and short selling
First, check the interest rate for securities lending and short selling of this stock. Stocks that support securities lending and short selling will show signs that support securities lending and short selling will appear below the price. After clicking in, you can check the margin rate for securities lending and selling.
After clearly understanding the relevant rate rules, you can directly carry out securities lending and short selling operations on US stocks.Click the trade button to automatically trigger the securities trading and selling operation if you do not hold stocks or if the number of shares sold exceeds the number of shares you already own. For example, if you want to short a US stock company, fill in the quantity 10 when there are no positions and click sell, that is, you have sold 10 shares short. On the position interface, the number of positions held will be displayed as a negative number.
The actual operation method for Hong Kong stocks is similar to that of US stocks, but not all Hong Kong stocks support securities lending and selling. It is necessary to check the relevant documents issued by the Hong Kong Stock Exchange to determine which stocks support short selling transactions. Furthermore, the Futu Niu Niu App will not open Hong Kong stock securities lending and short selling operations for the time being; investors can short sell by purchasing put options.
The consequences of the delisting of a company that made a short bid
There are many types of delisting situations. Mergers, acquisitions, privatization, failure to meet listing conditions, and facing bankruptcy and liquidation will all cause the company to face the risk of delisting.
If it is delisted due to mergers, acquisitions, or privatization, and the fundamentals of the company have not fundamentally changed, then there will be a clear price or stock conversion method to settle the shares that should be returned to the brokerage firm.
If the stock faces delisting due to deteriorating fundamentals, the stock will be transferred to OTC trading. Some companies just don't meet the listing conditions; the company still continues to operate, has transaction value, and will continue to have trading volume even off the market; some companies are unsustainable and have almost no value, so the stock is about to return to zero, and no one cares about it. After closing long and short positions, the end of life comes to an end. What is worth being wary of is that OTC trading has a low level of liquidity, which will further increase transaction costs for those who close positions.
Risk Alerts
The stock market is more likely to rise than fall. After the stock price rose, it fell back due to various reasons. There will be adjustments in the stock market, such as a bear market, a major crash, etc. However, from a long-term perspective, the stock market itself often reflects the development of the economy, technology, and civilization in this society, and the overall development trend of humanity is moving forward.
Borrowability and stock appreciation rules make it more difficult for bears to invest. Selling short requires brokerage firms to be willing to lend stocks to investors, so short orders often take longer to complete than buying orders. Exchanges also have promotion guidelines for short sales, that is, when stocks fall all the way down, investors cannot short sell; they must wait until the next time they rise to be updated before placing short orders.
Overlapping to make up for the risk. The so-called shortfall reimbursement means that when the stock price continues to rise, short sellers make short compensation (buy stocks and pay back) one after another to reduce losses. At the same time, a large amount of compensation from short sellers will cause the stock price to rise further, thus leading to greater losses for short sellers.
Risk of insufficient security deposit. Losses can easily get out of control when engaging in margin trading. Because every account must meet the minimum maintenance deposit requirement. If short sellers are unable to guarantee the deposit requirement, they may be forced to close their positions.
The risk of being emptied. When some institutions learn that there is a large amount of short selling in the market, they increase their holdings and hold a large amount of circulation, making it difficult for short sellers to buy stocks from the market at that time. This is called shorting. The liquidity risk of short selling is mainly reflected in some stocks with a smaller share capital.
Price increase transaction risk. The Hong Kong Stock Exchange requires that short sales must be traded at an increase in price, that is, the price of the short-sold securities must not be lower than the lowest selling price in the current market. This rule means that when the market falls, short selling can only be traded at an increased price, so short sellers cannot cause the market to fall to profit. At the same time, it may also make it difficult to complete short selling transactions.
Internationally renowned shorting agency
In addition to the well-known Muddy Waters, Citron, and Killer Whales, internationally renowned shorting agencies also include Glotx, which is famous for many battles, and GMT Research, which focuses on selling aerial securities.
Related reading:
The short selling agencies that disheartened investors and their shorting cases
Tips for the cow:
Overall, short selling is a good way to preserve stock value, but it also faces its own uncertainty and liquidity risks. Investors should think rationally and make careful decisions when making investment portfolios. After all, the room for stocks to rise is limitless, while the room for falling is limited.