By Lee Hyo-sik
Staff Reporter
South Korea has become increasingly exposed to household credit risks as many who are already overleveraged due to massive borrowings for home purchases engage in leveraged stock purchases for high returns.
Individual investors have returned to the stock market since March to capitalize on the foreigner-led rallies after suffering severe losses in the wake of the global credit crunch late last year. They emerged as a major market force and became more aggressive than ever before to make up for losses.
On top of seed money, many investors are borrowing to buy more shares and generate larger returns, betting that the local bourse will continue to head upward.
But analysts are warning that they could suffer greater damage if the market undergoes a steep correction.
According to the Korea Financial Investment Association, Monday, outstanding credit loans extended to retail investors by securities firms came to 4.54 trillion won as of Sept. 3, surging 201 percent this year.
The amount exceeded the 4.5-trillion-won mark for the first time since December 2007 when it stood at 4.51 trillion won, with the benchmark KOSPI hovering around 1,900. In particular, outstanding loans have surged by 500 billion won since mid-August, when the KOSPI passed 1,600.
Some investors are also turning to savings banks to boost leverage. The amount in stock loans extended by savings banks increased by 150 percent to 500 billion won early this month from 200 billion won late last year.
Active foreign buying has been a main engine for this year's bullish market run since March. International investors snatched up information technology (IT) and auto shares, among others. Their appetite for Korean stocks has exploded on the easing of the global financial market turmoil and the better-than-expected performance by Asia's fourth-largest economy.
Retail investors then jumped on the bandwagon and realized substantial returns over the past few months. To generate larger profits, a growing number of investors are taking greater risks by borrowing money from brokers to purchase more stocks.
When investors deposit a certain amount of money, securities firms extend loans in accordance with the size of deposit. For instance, an investor can borrow 15 million won from a brokerage firm for a 10-million-won deposit, meaning that he or she can buy shares worth 25 million won. If the market goes up, the investor can make larger returns.
But if share prices fall and the size of the investment drops to 21 million won, the broker begins selling investor shares to secure cash. When this happens, the investor instantly loses 4 million won. If the market continues to head downward, the investor sustains snowballing losses.
``When the market heads upward, investors buy more stocks. In the process, they borrow money to purchase more shares for larger returns. Considering KOSPI has been hovering at around 1,600 over the past few weeks, the amount of credit loans taken by retail investors is too excessive,'' Securities analyst Kim Dong-ha said.
Kim said the problem is when the market goes down. ``Shares bought through leverage will be sold by securities firms to secure cash, putting further downward pressure on the overall bourse. Leveraged retail investors will incur huge losses.''