As the KOSPI index, which set an all-time high after breaking through the 4,200 level, suddenly turned to a sharp decline, the so-called "debt investors," who borrowed money to invest, came under threat. As stock prices pledged to securities firms as collateral fell along with the loans, forced sales known as margin calls surged.
According to the Korea Financial Investment Association on the 9th, as of the 6th, forced sales relative to unsettled receivables from entrusted transactions totaled 21.9 billion won. It was a record high for this year. That was up 2.2 billion won from the previous peak of 19.7 billion won on Sept. 29.
A margin transaction is a short-term credit purchase in which an individual investor borrows money from a securities firm to buy stocks and repays the borrowed money within two business days. If the investor fails to pay for the stocks bought on margin on time, the securities firm sells the stocks by force (forced sale) to recover the claim.
When a forced sale occurs, the investor is likely to lose not only the loan principal but also most of the investment principal. That is because the securities firm sells the stocks received as collateral at fire-sale prices to recover the loan. Losses tend to be larger than with ordinary investments.
Borrowed investing by individual investors surged as the KOSPI index broke through the 4,000 level in a short period and set an all-time high. As the government repeatedly called for boosting the stock market and FOMO (fear of missing out) spread, a large amount of individual money flowed into the market.
As of the 6th, credit transaction financing balances totaled 2.58782 trillion won, setting a record high. The main board accounted for 1.60934 trillion won, and the KOSDAQ board was 978.48 billion won. Credit transaction financing, where the annual rate exceeds a minimum of 5% even for a one-day loan, is regarded as a key indicator of borrowed investing.
In this environment, as the KOSPI index slumped on a U.S.-driven artificial intelligence (AI) bubble narrative, the actual amount of forced sales relative to unsettled receivables from entrusted transactions jumped sharply.
The KOSPI index closed above the 4,200 level on the 3rd, setting an all-time high, but then fell below the 4,000 level. On the 7th, it slipped to the 3,950 level, and the aftermath appears to have driven a sharp increase in forced-sale supply.