The partial reactivation of short selling in South Korea, which kicked off last week, weakened investor sentiment among day traders, but the overall impact on the market was limited, according to industry sources on Monday. 

The key stock index maintained its upward trend.

Short selling is a trading tactic where investors immediately sell borrowed stocks on a bet that share prices will fall, allowing them to profit by later repurchasing the stocks and returning them to the lender. 

In February, the policymaking Financial Services Commission had decided to allow short selling of large-cap stocks listed on the Kospi 200 and Kosdaq 150 indexes from May. 

According to data from the Korea Exchange, the daily average trading volume on the retail-investor-dominated Kosdaq market amounted to 8.8 trillion won ($7.8 billion) as of Friday, sharply down from 9.1 trillion won estimated on April 30, one day before the financial regulator allowed the partial resumption of short selling after its 14-month ban to stabilize the virus-battered market. 

Despite the chilled investor sentiment in the secondary Kosdaq market, which retreated some 1 percent in the cited period, the nation’s main bourse Kospi rose 1.57 percent from April 30 to 3,197 points. 

Also, the benchmark Kospi’s daily volatility averaged 1.28 percent on Friday, decreasing from 1.7 percent a year earlier, data showed. 

Strong fundamentals of local companies, including financial stability and viable business models, prevented the main stock index from being weakened by the partial resumption of short selling, according to market experts. 

“Share prices change in accordance with a company’s growth potential in terms of future profits. If you invested in a company with strong fundamentals, you don’t have to be afraid short selling impact,” said Shin Seung-jin, an analyst at Samsung Securities. 

Meanwhile, driven by the FSC’s new stock lending system for individual short sellers, the volume of retail investors’ daily short-selling during the first week of short selling resumption stood at 15.2 billion won, on average.

The figure marked a twofold increase from 7.7 billion won estimated between January and March 16, when the financial authorities imposed a temporary ban on short-selling.

By Choi Jae-hee (cjh@heraldcorp.com)