The No. 1 rule for all stock investors is to never buy stocks with borrowed money.
But many investors tend to ignore this rule when the stock market becomes bullish, as it is today. As they borrow more for stock investments, chances will be higher that they will eventually go broke.
I recently read alarming news that the amount of loans people borrowed from brokerage companies for the purpose of securities investments soared to a record high of 7.07 trillion won. The amount increased by more than 2 trillion won for the first four months of this year, which means a lot more borrowed money was invested in stocks this year as stock prices rose.
It is not hard to imagine what will happen to them if the stock market tumbles and the price bubble bursts.
Hundreds of indebted individual investors will be caught in a debt trap because they will suffer huge losses from investments and be unable to repay their loans. The only way they can get out of the vicious circle is to hit the jackpot, but few people have that kind of luck.
Some failed stock investors, left under heavy debts, end up making tragic choices.
In January, a jobless man in his 40s in Seoul was arrested for killing his wife and two daughters. Police later found that he borrowed 500 million won from banks to invest in stocks, but lost most of the money. His apartment was then seized and put up for auction.
He later told police that he killed his family members "because it was impossible for him to continue to support them."
This could be a tragic example of what consequences stock investment with borrowed money will bring. But we can easily find people who are suffering from these mistakes around us.
I personally know a man who is now paying the price for investing in stocks with loans.
Last year, the man ― the sole breadwinner for his family ― borrowed 20 million won from a bank to buy highly volatile stocks in expectation of quick gains. The value of his shares has since tumbled and he is now seeking to borrow more to repay the debt.
It was a risky, reckless bet for him. He said he has never spoken about the investment failure to his wife and will keep it a secret forever because he did not want to disappoint her.
What's worrisome is that more and more people in the low-income brackets are flocking into the stock market in pursuit of high returns amid a sluggish economy and shrinking income.
According to government data, the amount of asset-backed loans extended to a household for the purpose of securities investment almost doubled to 550,000 won as of the end of last year, from two years earlier. Various types of collateral were provided to obtain loans ― houses, automobiles, savings, bonds and insurance policies.
Such loans to households in the bottom 20 percent income bracket grew 17 times during the same period. This means a much larger number of poorer people are buying stocks, bonds and derivatives with borrowed money.
Regulators should address this problem before it is too late. If the stock market goes downward, many indebted retail investors will become unable to repay loans in time and become credit defaulters.
Buying stocks with loans is an act of gambling, not investment, that can create a lot of social problems. That is not helpful for the development of the stock market. And in some cases, they turn to crimes out of despair.
The problem adds woes to policymakers who are grappling with the growing household debt. Data from the Bank of Korea show that about 20 percent of those in debt took out loans only to invest in securities.
Of course, the loans for securities investment tend to increase when the market becomes strong. However, people should be properly educated that investing in stocks with borrowed money could ruin their lives and often put their families at risk.