Why the Reddit trading frenzy and short selling won't work in China

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  • Short selling refers to a trading strategy that allows investors to bet that the price of a stock or security will fall.
  • In the last two weeks, members of the WallStreetBets online forum encouraged the bidding up of shares that hedge funds have shorted, resulting in a surge in some stock prices and losses for those funds.
  • Analysts say its unlikely something similar would happen in mainland China given tight regulation and online censorship.

BEIJING — The recent short selling frenzy on Wall Street will not likely come to China, where there are many more market restrictions.

Short selling refers to a trading strategy that allows investors to bet that the price of a stock or security will fall.

To short a stock, investors borrow shares and sell them, then ideally buy them back at a lower price later, and pocket the profits made. If the share price does not drop, the short seller will try to minimize losses by buying back the stock, which now costs more.

Investors in mainland China have a limited ability to short stocks — a sign that the local markets are still immature. Tight regulation and online censorship in China also contribute to different investor behavior versus that of the U.S.

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Since last month, millions of individual investors have piled into the WallStreetBets forum on Reddit, encouraging one another to bid up shares of stocks that hedge funds have shorted, or bet would fall in price.

A rush of trades through stock brokers like the free Robinhood app caused shares of heavily shorted stocks like GameStop, a video game retailer, to surge 400% in a week.

Shares of GameStop and others that were targeted by the Reddit community have since fallen drastically — but not before some funds betting against them lost billions of dollars.

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