On 31st last month, short selling resumed in the Korean stock market. On the first day, the total transaction amount for short selling reached 1.7 trillion won. Of this, 90% was foreign trading, while the remaining 170.7 billion won was accounted for by institutions and 14.2 billion won by individuals. Although it was a small proportion of less than 1%, it was interesting to hear that individuals are participating in short selling.

Searching 'how to short sell' in a popular stock cafe, I found several articles titled 'Can individuals short sell?' The responses converged to 'You can, but you shouldn't.' A comment noted, 'There are reasons why individual investors don't engage in short selling.' The more someone tells you not to, the more you want to try it. I decided to participate in short selling.

As the name implies, short selling involves selling stocks that one does not own, borrowing stocks that are expected to decline and selling them, and later buying them back at a lower price to make a profit. In simple terms, it is betting on a decline in stock prices.

If you complete the ‘Personal Short Selling Pre-Mandatory Education’ on the Korea Financial Investment Association Financial Investment Education Institute's website, you will see this screen./Courtesy of Jeong Eun-seo

To short sell as an individual, one must first complete an online training course and participate in simulated transactions. You can attend the 'Pre-Training for Individual Short Selling (New)' on the Korea Financial Investment Association's financial investment education center website. The training duration is one hour, and the fee is 4,000 won. During the prior short selling period, it was 3,000 won for 30 minutes, and those who attended that training do not have to retake it.

Once the training is completed, one can participate in simulated trading. However, I encountered a hurdle. After checking last short selling reviews and accessing the simulated trading system on the Korea Exchange (KRX) website, I couldn't find the membership sign-up button at all. After a call with the relevant department, I confirmed that since last year, securities companies have changed to provide their own simulated trading services.

I moved to the short selling simulation trading page indicated on the homepage of my primary broker, Samsung Securities. There, I signed up and created a virtual account. I also downloaded the simulated trading system. Now, I just need to conduct simulated transactions for one hour within this system.

When you access the simulation trading system, a warning related to short selling (lending) appears./Courtesy of Jeong Eun-seo

As soon as I accessed the system, a warning popped up stating, 'You could lose your entire principal when short selling.' For example, assume you have prepared 10 million won as collateral to borrow 10 million won worth of stocks. After borrowing stocks expected to decrease and selling them at the day's lower limit, the warning was that if the stock price rises to the upper limit the next day, the loss could exceed the investment principal.

Additionally, if the collateral maintenance ratio falls below a certain percentage due to price fluctuations of the sold stocks, additional money must be deposited, and if this is not fulfilled, you might face forced liquidation.

The simulated trading window resembles a home trading system (HTS) provided by securities companies. My virtual account had a capital of 30 million won. The possible quantity for borrowing was 100,000 shares. I practiced short selling by selling the borrowed stock (short selling) in the new short selling tab, then repurchasing in the buyback tab. If there is no activity for 10 minutes, you will be forcibly logged out, so I had to repeat this multiple times.

When presenting a selling price lower than the current price within the simulation trading system, an ‘Uptick Rule Order Violation’ warning appears at the bottom./Courtesy of Jeong Eun-seo

When I tried to sell stocks at a price lower than the current price, an alert stated, 'Uptick rule order violation,' and the transaction was not executed. The uptick rule means that when short selling, you cannot submit a sell order at a price lower than the last price. If the current price of the stock is 50,000 won, it means the short selling offer must be presented at 50,100 won or higher. This measure is to prevent price drops due to short selling.

The simulated trading system is divided into Part 1 (weekdays from 9 a.m. to 3:30 p.m.) and Part 2 (weekdays from 4 p.m. to 10:30 p.m.). Including the maintenance time (3:30 p.m. to 4 p.m.), I proceeded with the simulated trading, but no transactions were executed during this time. However, it was recognized as simulated trading time.

After completing the simulated trading and applying to utilize the borrowing transaction at the brokerage, all the preparations were complete. I used the mobile trading system (MTS) of Samsung Securities called mPOP. I searched for 'borrowing transaction application' in the mPOP search bar. I entered the pre-training completion number (14 digits) and the authentication key listed in the simulated trading certificate. After agreeing to various terms and conditions, the process was complete.

Graphic=Jeong Seo-hee./Courtesy of Major Details of Short Selling System Improvement Plans

The terms of use highlighted in red the regulations that have changed since this year following improvements to the short selling system. Both individuals and institutions must repay borrowed stocks within 90 days. Even with extensions, it can only be extended up to 12 months. Previously, there was practically no limit to the repayment period for institutions, while individuals had a 90-day limit, leading to many unfair criticisms.

The collateral ratio required when borrowing stocks has also been unified. The collateral ratio for individual borrowing has been standardized from the previous 120% to 105%, the ratio applicable to institutions and foreigners. The collateral ratio refers to the proportion of collateral that must be held against the value of borrowed stocks for short selling. This means you only need to have 1.05 million won in cash when borrowing stocks valued at 1 million won for short selling.

Having familiarized myself with all the instructions, I decided to enter the real market. I searched 'short selling' in the mPOP search bar and entered the transaction window. It was very similar to the general order window, but it showed the possible quantity for borrowing in the middle. New investors for short selling can transact within a limit of 30 million won. In the case of Samsung Securities, an interest rate of 4.5% or 6% per year is applied, but it is not directly visible from the transaction window. You must check the interest rate in the 'available short selling items' tab.

The available quantity for lending at POSCO FUTURE M is displayed as 0./Courtesy of Jeong Eun-seo

As my first investment item, I chose POSCO FUTURE M, which is considered a concentrated target for short selling. Although I complied with the uptick rule and offered a price higher than the current price, my sell orders were continuously rejected. Upon checking, the 'available' quantity was 0. This means there were no stocks left to borrow for short selling. POSCO FUTURE M recorded the 7th largest short selling amount (38.2 billion won) on the 31st last month.

Regrettably, I switched to a stock that still had available borrowing quantity, ECOPRO BM. When I offered a price 100 won higher than the current price, the short selling order was placed. However, whether there were many sellers and few buyers, the order was not executed for more than 30 minutes.

Meanwhile, the available borrowing quantity decreased by 110 shares, leaving only 39 shares. Based on the stock price at that time (96,000 won), the amount an individual could short sell was approximately 3.74 million won. It seemed insufficient to meet all the demands.

The short selling quantities provided by each securities company are mostly borrowed from the Korea Securities Finance Corporation. The Korea Securities Finance Corporation collects stocks entrusted as collateral for investors to borrow on credit and stocks are piled up as short selling amounts. An official from the Korea Securities Finance Corporation explained, 'The available short selling quantity increases again when short selling investors return stocks or when the collateral stocks increase.' In reality, the short selling quantity for POSCO FUTURE M, which was zero until the regular market session, rose to over 900 shares in the after-market.

Results of short selling for ECOPRO BM./Courtesy of Jeong Eun-seo

On this day, I short sold one share of ECOPRO BM and made a profit of 300 won. However, even if you repay the borrowed stocks on the same day, daily interest is charged. The interest rate applied to this stock for borrowing is 6% annually; calculating simply, the daily interest rate would be approximately 0.017%.

The final profit from short selling is the total obtained by adding the sale proceeds utilization fee (around 0.1% of the borrowing sale proceeds) when repaying the borrowed stocks.

Having directly experienced short selling, contrary to my worries, participation was not difficult. However, tracking stock price movements consistently to avoid principal loss and not being able to secure the desired borrowing quantity at the desired time were difficult challenges. There was also anxiety about when a forced liquidation might occur. I thought that I should consider other investment strategies that could yield a similar effect, such as inverse exchange-traded funds (ETFs) and put options.