For Malaysia, it become even worse. There are no put option nor put warrant listed on Kuala Lumpur stock exchange. That's mean the only way we can have profit is when market surge.
To really answer should Malaysia introduce short selling, we have to understand what is short selling and its effect on stock market and economic. Generally short selling means selling stock we don't have and buy it back later with hope that we can buy it at lower price. It effectively make stock market become more like derivative market or forex market. Yes it will make stock market more volatile but it greatly make market more relevant.
So what is the benefit of short selling?
short-selling help adjust price to the correct value. The efficient market hypothesis is based on the assumption (as well as many other assumptions) that short-selling is possible. While I don't believe in the efficient market hypothesis for other reasons (that is, many of those other assumptions are wrong), it is correct in noting that the ability to sell short helps move markets closer to that ideal.
If a certain stock (or other asset) is overvalued, yet the people who realize this have already gotten out of the stock, then the way for them to correct this overvaluation is to sell the stock short. That way, these informed investors can bring the price closer to its fair value. But if short-selling is banned, this kind of adjustment can't take place.
That mean we won't have crazy stock price trade at more than 100x PE and still going up everyday. Somebody will stop the market maker from doing it. In Malaysia case, Remember Iris?
Another aspect of this is that people who for some reason believe a certain stock is too cheap can use their money or even borrowed money to buy stocks they think are too cheap. Yet people who come to the conclusion that a certain stock is overvalued can't do anything about it unless they already owned the stock in the absence of short-selling. And even those that already owned the stock are limited to their stocks, while people bullish about the stock could possibly borrow to buy more of it. This creates an asymmetric situation where people bullish about a stock will have much greater influence than those that are bearish about it, which increases the risk that some stocks will be over-valued.
Like I said before, short selling never push the market lower because short selling activity create buying activity as short seller need to cover their position. Plus, if a company is doing good, no body will allowed short seller to destroy it's price. Bargain hunter will rush in. In other word, short selling help adjust a stock to its fair value price. If Citigroup is traded at 7.05, that's because it only worth 7.05 or less if government didn't guarantee their 300 billion bad debt.
Besides that, stock market that banned short selling generally have higher PE ratio than stock market that allowed short selling simply because people who think market is overvalued can't sell any stock without buying it first. However if they think market is overvalued, why should they buy in the first place. So only people that buy is those people who bullish about the market and won't sell it anytime soon. This create a situation we called a bubble. it make the stock market irrelevant and highly increase chances of financial crisis. So in longer term, short selling actually prevent those thing.
Overall I think short selling should allowed in all stock market including Malaysia as short selling help price adjust faster to its fair value. If a stock is worth 10 Ringgit, let the market force adjust it to 10 ringgit. Don't interrupt the free market and only allow price to go higher.
So what is the benefit of short selling?
short-selling help adjust price to the correct value. The efficient market hypothesis is based on the assumption (as well as many other assumptions) that short-selling is possible. While I don't believe in the efficient market hypothesis for other reasons (that is, many of those other assumptions are wrong), it is correct in noting that the ability to sell short helps move markets closer to that ideal.
If a certain stock (or other asset) is overvalued, yet the people who realize this have already gotten out of the stock, then the way for them to correct this overvaluation is to sell the stock short. That way, these informed investors can bring the price closer to its fair value. But if short-selling is banned, this kind of adjustment can't take place.
That mean we won't have crazy stock price trade at more than 100x PE and still going up everyday. Somebody will stop the market maker from doing it. In Malaysia case, Remember Iris?
Another aspect of this is that people who for some reason believe a certain stock is too cheap can use their money or even borrowed money to buy stocks they think are too cheap. Yet people who come to the conclusion that a certain stock is overvalued can't do anything about it unless they already owned the stock in the absence of short-selling. And even those that already owned the stock are limited to their stocks, while people bullish about the stock could possibly borrow to buy more of it. This creates an asymmetric situation where people bullish about a stock will have much greater influence than those that are bearish about it, which increases the risk that some stocks will be over-valued.
Like I said before, short selling never push the market lower because short selling activity create buying activity as short seller need to cover their position. Plus, if a company is doing good, no body will allowed short seller to destroy it's price. Bargain hunter will rush in. In other word, short selling help adjust a stock to its fair value price. If Citigroup is traded at 7.05, that's because it only worth 7.05 or less if government didn't guarantee their 300 billion bad debt.
Besides that, stock market that banned short selling generally have higher PE ratio than stock market that allowed short selling simply because people who think market is overvalued can't sell any stock without buying it first. However if they think market is overvalued, why should they buy in the first place. So only people that buy is those people who bullish about the market and won't sell it anytime soon. This create a situation we called a bubble. it make the stock market irrelevant and highly increase chances of financial crisis. So in longer term, short selling actually prevent those thing.
Overall I think short selling should allowed in all stock market including Malaysia as short selling help price adjust faster to its fair value. If a stock is worth 10 Ringgit, let the market force adjust it to 10 ringgit. Don't interrupt the free market and only allow price to go higher.
1 comment:
This is one of the best blogs Ive ever read. Youve got some mad skill here, man. I just hope that you dont lose your style because youre definitely one of the coolest bloggers out there.
Paras Tierea sec 137
3 BHK apartments in noida
3 BHK apartments on expressway noida
residential projects on noida expressway
Post a Comment