Why SEBON Should Introduce Short Selling in NEPSE Without Delay

Short Selling in NEPSE Could Bring More Balance to Nepal's Stock Market

Short selling in the Nepal Stock Exchange (NEPSE) could become an important tool for improving market efficiency and reducing some forms of market distortion.

As Nepal's capital market continues to develop, the introduction of a properly regulated short selling mechanism in NEPSE deserves serious consideration. The Securities Board of Nepal (SEBON) could consider implementing short selling with appropriate safeguards, investor education, margin requirements and risk-management rules.

There are two major reasons why short selling could be useful for the Nepalese stock market.

1. Short Selling Could Discourage Artificial Price Declines

One of the concerns in any stock market is the possibility of groups attempting to influence prices through rumors, fear, panic or misleading information.

When investors can only make money when share prices rise, there can be an incentive for some participants to create negative sentiment and attempt to push prices lower.

A regulated short selling system in Nepal could introduce another side to this equation.

If a stock starts falling because of genuine selling pressure or negative sentiment, traders who believe the price is overvalued could take short positions and potentially profit from further declines.

However, short sellers eventually need to buy back the shares or otherwise close their positions. This creates a natural mechanism through which falling prices can attract buying activity.

How Short Selling Can Work

The basic process is:

Borrow shares → Sell shares → Price falls → Buy back shares → Return shares → Potential profit

For example, if a trader legally shorts a stock at Rs. 500 and later buys it back at Rs. 450, the difference represents a potential gross profit of Rs. 50 per share, before transaction costs, financing costs and other applicable charges.

This does not mean that short selling will automatically prevent share prices from falling. Rather, it can create an additional market force that may improve price discovery.

Short Selling Could Also Create Short Squeezes

Another important feature of short selling is the possibility of a short squeeze.

When a large number of traders hold short positions and the stock unexpectedly starts rising, short sellers may be forced to buy shares to close their positions.

This additional buying can accelerate the upward movement.

Therefore, a market with both long and short participants can sometimes respond differently to changing information compared with a market where investors primarily profit from rising prices.

2. Investors Could Have Opportunities During a Falling NEPSE Market

Another major issue in Nepal's stock market is that traditional investors generally benefit when share prices rise but face losses when the market declines.

When NEPSE falls significantly, many investors lose portfolio value.

This can lead to frustration and criticism of market regulators, the Nepal Stock Exchange, policymakers and other capital-market institutions.

A properly regulated short selling framework could provide an alternative.

Instead of having opportunities only during a rising market, experienced traders could potentially use legitimate short-selling strategies during declining markets as well.

A Two-Way Market Can Improve Market Participation

A mature stock market generally needs mechanisms that allow investors to respond to both positive and negative expectations.

With appropriate regulation, short selling could allow traders to express bearish views through legitimate market transactions rather than relying on rumors or informal attempts to influence sentiment.

This could potentially contribute to:

• Better price discovery
• Greater market liquidity
• More balanced trading activity
• Improved risk-management opportunities
• More efficient valuation
• Greater participation from sophisticated investors

Short Selling Is Not a Tool for Beginners

Although short selling can provide opportunities, it also introduces significant risks.

Unlike a conventional share purchase, where the maximum loss is generally limited to the amount invested, a short position can potentially generate very large losses if the stock price rises sharply.

For example, a trader who shorts a stock at Rs. 500 could face substantial losses if the stock unexpectedly rises to Rs. 700, Rs. 1,000 or higher.

Therefore, short selling in NEPSE must be accompanied by strong risk-management rules.

Possible safeguards could include:

• Mandatory margin requirements
• Securities borrowing and lending infrastructure
• Position limits
• Circuit-breaker mechanisms
• Disclosure requirements
• Short-position reporting
• Broker-level risk controls
• Investor suitability and education
• Penalties for market manipulation
• Clear rules for forced position closure

Short Selling Alone Cannot Eliminate Market Manipulation

It is important to understand that short selling should not be presented as a complete solution to market manipulation.

Rumors, misinformation, coordinated trading and artificial price movements require effective surveillance and enforcement by the relevant authorities.

Instead, short selling could become one additional mechanism within a broader market-regulation framework.

SEBON, NEPSE, brokers and other market institutions would need to establish transparent rules before allowing widespread short selling.

Why Nepal Needs a More Balanced NEPSE Market

The Nepalese stock market has evolved significantly, with increasing participation from retail investors and growing interest in technical and fundamental analysis.

As the market develops, investors need more sophisticated tools.

A market where investors can potentially benefit from both rising and falling prices can provide a more balanced environment for price discovery.

However, short selling should be introduced carefully rather than simply opening the facility without adequate infrastructure.

The objective should be to create a transparent, regulated and risk-controlled short selling system in Nepal.

Short Selling and Investor Education

Investor education will be particularly important before short selling becomes widely available.

New investors may assume that short selling is simply the opposite of buying shares. In reality, it involves borrowing securities, margin requirements, financing costs, forced liquidation risks and potentially unlimited losses.

Investors should understand concepts such as:

• Stop-loss
• Position sizing
• Risk-reward ratio
• Margin
• Leverage
• Short squeeze
• Liquidity risk
• Market volatility
• Technical analysis
• Fundamental analysis

For investors interested in learning professional trading concepts, share market training in Nepal can provide a structured learning pathway.

Those interested in international currency markets can also explore Forex Trading Course in Nepal.

Conclusion: Should SEBON Introduce Short Selling in NEPSE?

Short selling could be an important development for Nepal's capital market if it is implemented through a well-regulated and transparent framework.

It could discourage some attempts to profit solely by creating fear and pushing prices lower, while also giving sophisticated investors a legitimate way to express bearish views.

At the same time, short selling carries substantial risks, particularly for inexperienced investors. Therefore, SEBON should prioritize investor protection, strong surveillance, margin controls, securities lending infrastructure and investor education alongside any short-selling framework.

A properly designed short-selling system could help make NEPSE a more balanced, liquid and efficient market.

Learn Share Market & Trading in Nepal

Want to understand NEPSE analysis, technical analysis, fundamental analysis, trading psychology, risk management and professional trading strategies?

Explore Sarbaguna's Complete Share Market Learning Course in Nepal and professional trading education.

For professional guidance and course information:

Deep Thapa
Call/WhatsApp: 9849290806

Disclaimer: This article is for educational and informational purposes only. Short selling involves significant financial risk. Investors should understand applicable rules, costs and risks before participating in any short-selling or leveraged trading activity.