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Monday, 27 May 2019

EGX releases short-sellable stocks list

Have someone you want to short? Here is your list of targets: The Egyptian Exchange released yesterday the list (pdf) of stocks that can be shorted. The list of 30 companies includes Telecom Egypt, EFG Hermes, Palm Hills, Qalaa Holdings, Elsewedy Electric, Orascom Investment, Talaat Moustafa, CIB, Sodic and the EGX30 Index ETF, among others.

How were these shares selected? Shares need to meet a threshold qualifying them as frequently traded and at least 10% of registered brokerage firms need to be trading the share in question. The company’s freefloating shares must have a turnover rate of 20%. You can check out the selection criteria, issued earlier this month, here.

What are the regulations for short sellers? The Financial Regulatory Authority (FRA) in February issued regulations for short selling on the EGX, allowing brokerage firms to act as market makers by finding lenders and borrowers of stocks. Under the regulations, you can only short 25% of a company’s freefloat shares while any one shareholder won’t be able to lend more than 5% of a company’s shares. The regulations will also cap the total percentage of any company’s shares that can be used to create a short position. Folks looking to open a short position will need to put down 50% of the value of the securities borrowed, and brokerages will be required to park 20% in fixed-income instruments while the position is open.

Mommy, what’s a short? Think of it this way: For whatever reason, you think a share is overvalued. How do you profit on your belief? By shorting it. At the simplest level, it works like this:

  • Borrow the shares (likely from someone who wants to hold them long-term);
  • Sell them;
  • Pray the price goes down (and mount an activist campaign if you have to…);
  • Buy them back on the open market and return them to their rightful owner to “close out your position”;
  • Pocket the difference (presuming, of course, the price went down).

Why this is a really risky thing to do: Let’s say you’re wrong. The share goes up. You still need to close out your short position, and you’ll do so at a loss by buying them back at more than you sold them for — incurring interest expenses on your margin account in the process. Investopedia has more.

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