Sunday, May 31

Naked short selling

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Naked short selling is the selling of a stock without prior ownership of the stock. In other words, one sells a stock which he does not owned or has not borrowed. This is often done in an attempt to profit from the difference in the selling price or buying price. For example, if you sold 1 lot of a counter at $1.00 and buy back 1 lot of the same counter later at $0.90, you will gain a profit of $0.10 per share or a total profit of $100.

SGX has imposed rules on naked short selling. If the naked short selling results in failed delivery of the shares to CDP, SGX will impose penalties on the person who perform this transaction. The penalty currently stands at 5 percent of the value of the transaction or a minimum of $1,000. Additionally, SGX will buy back the shares on the third day of the transaction from 1130am onwards on behalf of that person with a processing fee of $30. After the completion of this buying in, SGX will publish the list of securities which have been bought, the volume and dollar-value at 8:30 am the following business day.

My advice to those who wish to carry out short selling is do not use naked short selling. There are other cheaper and better ways of carrying out short selling. This includes the use of Contracts for Difference or CFD in short, Securities Borrowing & Lending or SBL in short, which is available through some brokerages, or the Extended Settlement Contracts or ES contracts in short, which has been introduced by SGX not long ago.
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20comments

  1. AnonymousMay 31, 2009 at 8:26 AM

    How bout not shorting at all!! Shorting dishonestly creates duplicates in the market (duplicate owners really), it is dishonest in not informing lenders, extra shares/owners drives down the price, makes incentives to spread rumors, and ultimately destroys wealth, jobs and economies. Benefits claimed are overstated by an industry bent on protecting commissions from shorting activities.
    Those who are disgusted at such tactics can voice their displeasure here
    http://www.petitiononline.com/shortNOT/petition.html

    Cheers

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  2. usurperMay 31, 2009 at 5:33 PM

    Ban naked short. It is unethtical.

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  3. donMay 31, 2009 at 8:15 PM

    Hi kay, do you explaining in more details the alternatives to short selling? I'm new to investing, and I am trying to find out as much as I can. Thanks.

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  4. AnonymousMay 31, 2009 at 8:36 PM

    Market has been up for 12 weeks now. where do you think STI will correct to? or will it correct sharply?

    http://forex-all-online.blogspot.com/

    ReplyDelete
  5. KayJune 1, 2009 at 12:09 AM

    Hi Anonymous and Walter,

    I understand your stand on shorting as unethical. This post that I written is more of to let people know about naked short selling although I don't short as it's not part of my investing methodology.

    Kay

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  6. KayJune 1, 2009 at 12:14 AM

    Hi Don,

    I suggest that you can look at some of the website of the market providers that deals in CFDs for more information. Some of these websites have tutorials about CFDs too. Some links include,

    http://www.cmcmarkets.com.sg/en/content/index.jsp
    http://www.saxocapital.com.sg/
    www.igmarkets.com.sg

    As for the SBL, you can look at the websites of some of the local brokerages such as Philips Securities, Kim Eng, iOCBC etc. Essentially, some stockholders are willing to lend you the stocks through these brokerages for a fee and you use their stocks to carry out shorting.

    As for the ES contracts, SGX has put up some investor educational info @ http://www.sgx.com/wps/portal/marketplace/mp-en/products/securities_products/extended_settlement
    You can take a look there for more information.

    Kay

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  7. Panduan Bisnis InternetJune 3, 2009 at 3:32 PM

    This comment has been removed by a blog administrator.

    ReplyDelete
  8. jl81June 9, 2009 at 10:15 AM

    Dear Kay,
    I am new in the world of investing and trading. I wish to learn more on all aspects of knowledge. I am confused by "Normal Short Selling" and "Naked Short Selling"? I know naked short sell means selling stocks which you doesnt own at all, at a price and then buy them back at a lower price by the end of the market day. Isnt Normal short selling the same as this? Thank you very much!

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  9. KayJune 9, 2009 at 11:02 PM

    Hi jl81,

    To my understanding, what you are describing is the technique of short selling. Naked short selling is when you sell stocks that you do not own but you do not cover it back as you will let SGX buy back the stock for you on your behalf on the third day. That is the main difference.

    Kay

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  10. jl81June 10, 2009 at 12:28 PM

    Hi Kay,

    Oh i see! thanks so much for your help. Hope to learn more from you and thru your blog in the future. Thanks for having such an informative portal around, need to learn more. Seeya!

    ReplyDelete
  11. KayJune 10, 2009 at 9:58 PM

    Hi jl81,

    I'm glad to be of some help.

    Kay

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  12. jl81June 19, 2009 at 5:01 PM

    Hi Kay,

    Will appreciate if you can clarify this question for me? In Singapore, when we "contra" it means if we buy positions today, we got to sell them out by T+3 right? And in between if there are profits we dont need to so-call fork out any cash at all? if loss we pay the differences to the brokerage right? BUT does this contra-ruling works for US markets as well? I mean if we perform this buying US shares using our local online portal like DBS Vickers? Does it work same as T+3 also?

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  13. KayJune 21, 2009 at 12:03 AM

    This comment has been removed by the author.

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  14. KayJune 21, 2009 at 12:04 AM

    Hi jl81,

    You are correct with regards to the Singapore market. To the best of my knowledge, you cannot contra for US market unless you are buying and selling off the counter within the same trading day. However, some brokerages may have different rules so it will be best to check out with the particular brokerage which you will be buying stocks in the US markets through.

    Kay

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  15. jl81June 21, 2009 at 2:16 AM

    Hi Kay,

    I see! ok thanks i got it! i will check with them again on this. Seeya.

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  16. donAugust 1, 2009 at 9:16 PM

    Hi Kay, I have been reading about options recently and I am finding out more about it before investing in it. What is the difference between Option and CFD? Can I trade option in poems?

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  17. KayAugust 2, 2009 at 5:11 PM

    Hi don,

    I have no experience in options trading so I don't think I'm able to answer your queries. My apologies.

    Kay

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  18. short sale realtorMarch 23, 2010 at 9:08 PM

    I would like to thank you for sharing your thoughts and time into the stuff you post!! Thumbs up

    ReplyDelete
  19. QUALITY STOCKS UNDER FOUR DOLLARSJanuary 2, 2013 at 5:31 AM

    I have never been a big fan of short selling. Your risk on the upside is totally unlimited.

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  20. Open Your EyesApril 10, 2013 at 3:42 PM

    I think this is the worst way of speculating

    ReplyDelete

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