Retail investors using margin loans posted an average return of minus 19%, more than twice as poor as that of general investors
The balance of margin loans held by individual investors has approached 35 trillion won as of April 22. (Photo courtesy of thepoorswiss.com)
As the KOSPI continues to hit record highs, the balance of margin loans held by individual investors has approached 35 trillion won, or about $23.6 billion, raising warnings of market overheating.
While leverage is used to amplify gains during a bull market, it can act as an amplifier that triggers forced selling when volatility rises, further deepening market declines.
According to the Korea Exchange on April 24, the KOSPI index closed at 6,475.81 yesterday, up 0.90 percent or 57.88 points from the previous trading day, setting another record high. The index extended gains during the session to the 6,530 range and was trading at 6,483.17 as of 9:55 a.m., up 0.11 percent or 7.36 points from the previous day.
The key concern is the pace of leveraged investment expansion. As the stock market continues to set record highs, the balance of margin loans has also climbed to an all-time high.
According to the Korea Financial Investment Association, the margin loan balance stood at 34.81 trillion won as of April 22, marking a record high. Although the balance had fallen to around 32 trillion won earlier this month due to heightened geopolitical risks in the Middle East, it rebounded by more than 2 trillion won in just 15 days as the KOSPI resumed its rally.
Margin trading typically increases during a bull market, but the recent pace of growth is considered steeper than in the past.
In particular, the current rally has also been influenced by a shift in funds from overseas stock investors. Individual investors seeking to ease capital gains tax burdens on U.S. stocks have partially returned to the domestic market, adding to demand.
Indeed, the Returning Investor Account, introduced by the government as a countermeasure to address the high exchange rate, surpassed 160,000 accounts and a balance of 1 trillion won within one month of its launch. The return of so-called “Seohak Ants,” referring to Korean investors who buy U.S. stocks, to the domestic market has boosted short-term liquidity and supported the index’s rise.
However, the situation could change rapidly in a downturn.
If stock prices fall below a certain level, securities firms execute forced selling to maintain collateral ratios, which can trigger a vicious cycle of further declines. Especially in periods of high margin balances, such selling pressure can occur simultaneously, leading to a repeated cycle of forced selling and market declines, potentially causing cascading declines.
What is even more concerning is the trend of losses from leveraged investing being concentrated among young people and individual investors with smaller capital.
An analysis by financial authorities of about 4.6 million individual investor accounts at two major domestic securities firms during a correction early last month found that investors using margin loans posted an average return of minus 19 percent, more than twice as poor as that of general investors. In particular, small-scale investors in their 20s using borrowed funds recorded losses more than three times larger than those of investors who did not use margin loans.
The securities industry is moving to respond preemptively. Some firms have begun risk management measures such as adjusting margin loan limits or restricting new purchases of certain stocks.
KB Securities has halted new purchases of contracts for difference (CFD) for SK hynix. CFDs are high-risk leveraged over-the-counter derivatives where investors settle only the difference in price fluctuations without holding the underlying asset. The firm said the move is intended to prepare for increased market volatility and reduce high-risk leveraged investments.
Mirae Asset Securities has also downgraded 20 stocks, including Kakao, Alteogen, HYBE and LG Energy Solution, from Group E to Group F, where new margin lending is restricted, starting on April 22. It has also raised the margin requirement for 10 stocks, including Hana Micron and Daeduck Electronics, to 100 percent from the previous 30 to 40 percent.
On the same day, Toss Securities raised margin requirements to 100 percent for certain stocks, including EcoPro HN and Samsung Electro-Mechanics, and classified four exchange-traded funds, including the recently listed Kiwoom Samsung Electronics & SK hynix Bond Mixed 50, as Group F. Kakao Pay Securities said it would suspend new margin loan purchase orders until further notice due to the exhaustion of its credit provision limit.
Industry insiders point out that financial authorities need to establish clear standards to respond to signs of market overheating. They suggest a need for a system where regulations are tightened in stages linked to margin balance levels, or management plans that adjust leverage limits for each stock in real-time.
An industry official stated, “In the current phase, a mechanism is needed that goes beyond simple warnings and automatically strengthens regulations in line with the pace of margin balance growth. A system that flexibly adjusts leverage limits by reflecting the volatility and liquidity of each stock must be established to mitigate market shocks in the event of a downturn.”
비지니스코리아 비지니스코리아 기자 (pr@businesskorea.co.kr)
Yoon Young-sil
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