What Is Short Selling?

Short selling is a transaction where you sell first before buying.

Normally, investors (for example, those investing in stocks on Bursa Malaysia) must hold shares first before they can sell them.

Logically speaking, how can you sell something that does not belong to you, right?

However, in short selling, the buy and sell process is reversed. This means the investor sells the shares first and only buys them back later.

Sounds confusing, does it not?

In this scenario, the investor starts and ends with no shareholding.

How Does It Work?

Short selling allows traders to profit when the market is falling.

Short selling occurs when an investor borrows shares from their broker and sells those shares.

The investor must then buy back the same shares to replace the ones borrowed.

The investor anticipates that the share price will fall. So the shares can be bought back at a lower price than the original selling price.

If this happens, the investor earns a profit from:

Selling Price – Repurchase Price

Short selling is typically suited for experienced traders. Beginners and mid-term or long-term investors are not encouraged to short sell because it must be done on an intraday basis.

For example, you short sell Stock X in the morning when the market opens. You must then buy back Stock X before the market closes at 5 PM on the same day.

If you fail to do so, you must borrow shares from a licensed securities lender approved by Bursa Malaysia, or have them transferred from another CDS account.

According to the regulations, a trader who borrows from a licensed lender must return the shares by T+6. Meanwhile, the borrower must buy back the shares within T+6.

Is Short Selling Legal?

An announcement by the Securities Commission (SC) and Bursa Malaysia in 2018 launched Intraday Short Selling (IDSS).

The relaunch of IDSS was an effort to increase liquidity in the local market.

Shariah Ruling on Short Selling

Before engaging in any transaction, we must first understand its ruling.

The question is: can you sell something that you do not own?

The Prophet SAW said,

"Do not sell what you do not own."

Therefore, Islamic scholars have ruled that such a sale is prohibited (haram).

(Dr Ma''bad Ali Al-Jarihi, Al-Aswaq Al-Maliah, 1/134; Ahkam al-Aswaq Al-Maliah, Dr Muhd Sabri Haron, p. 269)

However, the Shariah Advisory Council of the Securities Commission Malaysia has ruled that if short selling is conducted in a specific and regulated manner (Regulated Short Selling, RSS), it is permissible (Harus).

... SAC at its 69th meeting on 18 April 2006 resolved that regulated short selling (RSS) is in line with the Shariah as the inclusion of SBL principles in RSS eliminates the element of gharar.

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