Around GMA

Article Inside Page

The U.S. stock market has been shaken by an unusual player in the past couple of days.

GameStop - the struggling video game and console retailer - has suddenly kicked out of submission, its stock price soaring from around $4 to $347 as of January 28.

That means that investors who placed money on GameStop gained tremendously and were a tad richer at least on paper.

So what happened?

It started after a group of amateur share traders on Reddit noticed sizeable “short” positions placed on GameStop stocks.

“Short selling' is a sequence of financial trades that allows investors to effectively bet on a stock going down. Normally, investing means buying an asset at one price and hoping that it will rise in value. When the asset is sold you can make money,” wrote Ed Monk of Fidelity International.

Typically, investors anticipating a decrease in stock value would borrow shares from a broker or financial institution then sell them.

To make this scheme work, the stock value must further go down so investors could buy back their shares but at a much cheaper price.

They will then pay the broker or lending institution and take the difference as profit.

In GameStop's case, the amateur traders started buying the stock to push the price higher thus putting pressure on short-sellers to sell their position at a loss.

Some people likened what happened to a group of ragtag individuals outsmarting the establishment.

Is short selling legal?

It is in most stock markets around the world.

However, this method - and because of its speculative nature - is better left to experienced traders who are knowledgeable on stock price movements.

Take note that even seasoned traders cannot predict accurately where stock prices are heading.

In short, the risk is simply too great for untested traders and they might end up losing a significant amount of money in the end.

How about in the Philippine Stock Exchange?

At the moment, short selling is not yet allowed in the Philippine Stock Exchange.

However, plans are already in place for the PSE to adopt the method once certain hurdles are cleared out.

The PSE earlier said that it's thinking of incorporating short selling this year but certainly not during the first quarter.

The Securities Exchange Commission (SEC) has approved the guidelines to be followed by traders and investors wanting to dabble into short selling.

Companies eligible for short selling though are restricted and limited only to those in the PSE index (PSEi) and exchange-traded funds.