The Korea Exchange and the Korea Financial Investment Association recently urged investors and securities firms to be cautious, saying cases of "borrowing to invest" are increasing as the domestic stock market has risen sharply.
On the 17th, the exchange and the association issued a joint press release, saying, "The size of margin financing has increased about 49% from the end of last year (1.58 trillion won) to exceed 2.3 trillion won," and "Funds surrounding the stock market, including margin financing, have generally increased in tandem with the expansion of trading volume due to the recent rise in stock prices."
Credit margin financing is when a customer borrows money from a securities firm to buy stocks, with the aim of increasing revenue by using loans as leverage in a rising market. The stocks purchased at this time become collateral for the loan.
If stock prices fall and the value of the collateral declines, the likelihood of forced selling by the securities firm increases. As of the end of last month, the outstanding balance of margin financing amounted to 2.35 trillion won.
The exchange and the association noted that leverage investments such as margin financing should be undertaken with consideration of investment tendencies and the nature of funds. This is because losses can grow rapidly if market conditions differ from expectations. In particular, many investors in the youth segment and in their 50s to 60s use credit margin financing.
The two institutions said, "If there is short-term demand for funds, investment techniques that increase volatility, such as margin financing, should be avoided."
The exchange and the association pointed out that credit margin financing can amplify stock market volatility. If investors lose their shares due to forced selling in a downturn, they may be unable to take full advantage even when a rising market returns. They also added that a high outstanding balance of margin financing could act as a factor for a chain reaction of price declines, requiring particular caution.
The institutions said, "Market volatility is expanding as external variables such as U.S.-China tensions and the possibility of a short-term correction following the stock market's continued rise have been raised," and urged, "At such times, it is especially important to be more prudent in using margin financing."
They added that caution is also needed regarding trading that indiscriminately chases "issue stocks" driven by rumors and speculative demand.
In addition, the exchange and the association asked securities firms to strengthen consumer protection measures, such as monitoring the status of margin financing and managing stocks ineligible for credit trading.
Given the market conditions of high stock market volatility, the exchange plans to conduct swift surveillance of market-disrupting activities, such as real-time monitoring of unusually skyrocketing stocks, and to respond firmly when problems are detected.
For unusually skyrocketing stocks, it will actively use inquiry disclosures. An inquiry disclosure is when the exchange asks a listed company to disclose to the market whether there is any undisclosed material information in cases of sharp price swings or rumors.
An exchange official said, "If you become aware of conduct suspected of unfair trading related to unusually skyrocketing stocks, it is necessary to actively report it to the Market Surveillance Committee's Unfair Trading Report Center."