Short selling is the selling of a stock that the seller does not own. More specifically, a short sale is the sale of a security that isn't owned by the seller, who, however, promises to deliver it.
Hong Kong Market does not allow “Naked Short Selling.” The investors should arrange the stock borrowing before short selling in market.
Hong Kong Exchange reviews the "List of Designated Securities Eligible for Short Selling" from time to time. Currently it lists nearly 1,000 stocks eligible for short selling. The short selling turnover amount is about 9.41% of the market in 2015. Institutional clients short the stocks for arbitrage and hedge and some individual professional clients do so for profits.
Short selling allows investors to profit from a decline in a security’s price. An investor borrows a share of stock from a broker and sells at a high price. Later, the short-seller purchases a share of the same stock in the market at a lower price and return it to the lender. The profit is the difference of prices.
Day 1 (T): Borrow stocks worth HK$1 m in value and sell them in the market the same day.
Day 3 (T+2): If the Collateral Ratio is 135%, borrower should pay HK$1.35 M in collateral to lender and receive HK$1 M in cash from the selling order on T. It means the total investment of this transaction is HK$350K.
Collateral Amount = Borrowed Stock Value x Collateral Ratio
Assuming that the stocks are bought back on T+13,
Day 14 (T+13): Buy back the short selling stocks and inform broker to return the stocks. (Assuming the value of stocks bought back is HK$880K)
Day 16 (T+15): Return the stocks and pay HK$880K for the T+13 buy back transaction and receive HK$1.35 M in cash collateral. As a result, the cash flow is HK$470K.
Rate of Return Calculation (Simplified with the interest and transaction costs excluded.)
Return Rate = Net Profit/Investment Cost
= (HK$470,000 -HK$350,000) /HK$350,000
= 34%
Short selling transaction involves infinitive risk. The investor may face margin calls and unlimited loss.
Lender has the right to request borrower to return the stocks. The borrower should buy back the stocks in any market conditions.
All information contained herein is for reference only. Please ensure you have fully understood the abovementioned (and other) risks involved before you make any investment decision. We encourage you to be vigilant and never trade in any investment instruments if you cannot afford to lose. Make sure you monitor your open positions when trading in volatile markets and take advantage of stop-loss and limit orders. Our professional team will be using their best endeavors to assist and answer your questions.
If there is any inconsistency and ambiguity between the Chinese and English versions, the English version shall prevail.