Anna Jiwon Park has been covering the politics at The Korea Times since the summer of 2024, when she joined the press pool for the Office of the President in Korea. Prior to that, she spent about five years reporting extensively on financial markets, regulatory authorities and the financial industry. She joined The Korea Times in 2019 after spending eight years as a broadcast journalist at Arirang TV, Korea’s leading global broadcaster, covering politics, defense and culture.
Nasdaq vs. Kosdaq: similar only in name
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By Anna J. Park
Two bourses etch divergent trajectories of growth
By Anna J. Park
Despite pervasive fears of the further spread of the new coronavirus, the Nasdaq hit another record high last Friday, closing at 9,731.18, up 0.2 percent from the previous close.
Seeing the Nasdaq's continuous bullish run for the past decade, some might wonder about the Kosdaq's disappointing past performance of just spinning its wheels, and what factors may have caused such different trajectories for the two markets.
Korea's secondary bourse ― the Korea Securities Dealers Automated Quotations ― was launched in 1996, benchmarking the U.S. National Association of Securities Dealers Automated Quotations that began back in the early 70s.
The Kosdaq originally aimed to nurture innovative and tech-heavy companies just like the Nasdaq which has many global-leading tech firms listed. However, the only similar thing is in their naming, the two markets rarely seem to share a comparable performance.
The numbers clearly show the divergence between the two indices.
For the past five years from Feb. 13, 2015 to Feb. 14 this year, the Nasdaq has increased a whopping 98.8 percent, from 4,893.84 to 9,731.18. The Kosdaq, meanwhile, increased by only 13.2 percent during the same period, from 608.07 to 688.91.
Experts attribute such contrasting performances to the two bourses' completely different natures.
“The two markets were entirely different from the beginning. While the Nasdaq naturally attracted tech-centered innovative firms to its market as it began operations as the world's first electronic stock market, the Kosdaq was created as a secondary market in addition to the nation's benchmark KOSPI market,” Kim Young-hwan, an analyst at KB Securities told The Korea Times.
Kim said besides the difference in the beginning, there are two factors that largely explain other differences in the two markets.
“First, there is the huge gap in the sheer size of Nasdaq-listed firms and Kosdaq-listed companies. The world's largest companies by market cap, such as Apple, Google, Amazon and Facebook, are all listed on the Nasdaq, while most firms on the Kosdaq are small or mid-cap,” he said.
“Also, the business sectors' weight in the two stock markets is very different. The Nasdaq is tech heavy and IT-centered, and could outperform along with IT sector-led growth over the years. But the Kosdaq does not have any such evidently outperforming sectors,” Kim continued, adding that the Kosdaq contains a small weight of finance or semiconductor-related stocks, which brought about better performances than the KOSPI.
Kosdaq remains as minor league
What is also unfavorable to the Kosdaq is that the key objective in its creation was to nurture and support smaller venture firms that could not meet the KOSPI's fastidious criteria for listing. In other words, weak businesses that do not qualify for KOSPI's stringent requirements can still have a shot at listing on the Kosdaq market.
As a result, a few delinquent firms could disrupt the market, and this in turn would give robust Kosdaq-listed firms motivation to move on to the KOSPI to enhance their own market value. Innovative tech-firms such as Kakao and Celltrion are such examples that moved to the KOSPI, after successfully listing on the Kosdaq.
“If such successful firms remain on the Kosdaq market, then investor perception could be enhanced, and this might deter further transfers from the Kosdaq to the KOSPI,” Kim Joon-seok, a senior research fellow at the Korea Capital Market Institute (KCMI), told The Korea Times.
“However, if any newcomers with weak fundamentals cause more problems on the market, then solid firms would again try to escape from the Kosdaq in an effort not to be treated as equal to the weak players. In this case, the Kosdaq's current identity as a minor league could be fixed,” Kim added.
While the Kosdaq is treated as a secondary minor league compared to the KOSPI, the Nasdaq maintains a very equal and competitive relationship with the New York Stock Exchange (NYSE). The two markets have distinctively different characters, with the Nasdaq having strengths in IT-centered companies and the NYSE in conventional big businesses, yet they compete fiercely as equally-competent rivals.
Lowering threshold for Kosdaq listing
Against such a backdrop, market watchers take a prudent approach toward the Korea Exchange's (KRX) new set of measures aimed at further lowering the threshold for a Kosdaq listing.
The KRX announced earlier this month that it will revise listing requirements for newcomers in a way that puts more emphasis on the growth potential of a firm, in an effort to boost the stagnant secondary market and to create more favorable environment for innovative firms,.
In this regard, requirements for listing will be simplified focusing on the size of market capitalization, rather than relying on past performance.
Listed firms in the areas of bio-tech and the Fourth Industrial Revolution will also get the benefit of lowered requirements to maintain their spot on the Kosdaq market.
“I am not sure whether these changes will boost the Kosdaq market, because it could also send the wrong signal to the market that the level of possible danger is increased, despite the good intentions,” an unnamed market watcher told The Korea Times.
“If the measures are executed well, according to these intentions, then it might help the Kosdaq market grow on the condition that a thorough review is done. However, measures lowering requirements alone do not create innovative and good venture firms. A more fundamental change in regulations for the financial and industrial sector seems necessary,” he added.
Kim of KCMI also takes discreet position about the KRX's new measures.
“They could either boost the market or could affect the market negatively. By lowering the threshold for potential companies, it could also allow firms with high uncertainty into the market,” Kim said. “If successful cases abound, they would help the market, but with more of the opposite, they would further cause the market to slump.”
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Another deep-rooted problem on the Kosdaq market is that individual investors bear such risks as they lack competence in clearly analyzing listed firms' financial structures.
Institutional investors that have the ability to closely look into companies' financial statements, have not shown much interest in Kosdaq-listed businesses.
“Most investors in the Kosdaq market are individuals, lacking information and analysis competence. They also exert few monitoring powers over the firms, different from institutional investors. That's why they become major victims, if there's any problems with a listed firm,” Kim explained, adding this tendency harms the Kosdaq market's credibility and attraction.