Individual investors who borrowed money to buy stocks, pushed by FOMO, are exposed to the risk of forced liquidation. The possibility of margin calls has grown as the KOSPI index, which had topped 6,000 last week and surged, plunged nearly 20% over two days amid signs of an expanded U.S.-Iran conflict. In the securities industry, there are also concerns that large-scale margin selling could trigger a vicious cycle in which additional margin selling follows.
According to the Korea Financial Investment Association on the 5th, as of the 3rd, the balance of margin transaction loans stood at 32.804 trillion won. By market, it was 21.778 trillion won on the Korea Exchange main board and 11.026 trillion won on the KOSDAQ. The margin transaction loan balance first exceeded 20 trillion won on June 23 last year and then surpassed 30 trillion won for the first time on Jan. 29 this year. In just over a month since then, it has set another record high.
A margin transaction loan refers to the amount an investor borrowed from a securities firm to buy stocks and has not yet repaid. An increase in the balance means the scale of so-called debt-fueled investing has grown, and is typically interpreted as a signal that money betting on a bull market is rising.
The problem is that when the index plunges, margin positions can face forced liquidation. Margin accounts typically must maintain a minimum collateral ratio of 140%. If stock prices tumble and collateral value falls below that threshold, the securities firm immediately demands additional margin. If the investor fails to meet the margin call by the next day, at the open on the following day (D+2), the holdings are forcibly sold at the lower limit, maximizing the investor's losses.
In particular, the fact that the KOSPI and KOSDAQ indexes plunged at a record pace over two days is heightening fears of margin selling. The KOSPI sank 7% on the 3rd and fell more than 12% on the 4th, crashing a full 20% over two days. The KOSDAQ also posted a double-digit decline over the same period. As a result, there are projections that a "dumping of shares" from those unable to withstand collateral shortfalls in this sell-off will flood the market early on the 5th to 6th.
An even bigger problem is that once lower-limit shares from margin selling hit the market, it could trigger a vicious cycle of "margin selling → index decline → additional account collateral shortfalls → secondary margin selling." In this scenario, individual investors' losses could snowball.
Receivables from cash-short spot transactions in entrusted trading—funds with an ultra-short-term trading profile—are also a ticking time bomb. This type of transaction uses a securities firm's funds to buy stocks and repays within two trading days, a very short-term leveraged bet premised on a two-day price rise. However, with share prices plunging, failure to pay the receivables within the deadline immediately triggers forced liquidation procedures.
According to the Korea Financial Investment Association, as of the 3rd, receivables from entrusted trading stood at 1.0606 trillion won. These receivables, which were in the 800 billion to 900 billion won range in March last year, have moved above an average of 1 trillion won this year alongside the market's sharp gains. In particular, as the scale of such transactions swelled while the KOSPI was breaking through 6,000 points last week, the two-day plunge this time could lead to large-scale forced liquidations.
Cho A-in, a researcher at Samsung Securities, said, "With a higher share of leveraged investing and the domestic market plunging for two straight days, concerns are spreading that a flood of margin selling could hit the market."