Investors increasingly buy stocks with borrowed money over bull market

A giant screen shows the benchmark KOSPI closing at 3,021.84 points, Friday, up 44.1 points from the previous session, at the main lobby of the Korea Exchange's (KRX) Seoul office. Courtesy of KRX

Stock investors are increasingly taking on debt to buy more shares, riding a bull market underpinned by President Lee Jae Myung’s pledge to end a longstanding discount of the market valuations.

Nevertheless, investors should be cautious in borrowing money excessively, as the market can get overheated and fall sharply if Lee’s reform plan does not turn out to be effective, according to analysts, Sunday.

According to the Korea Financial Investment Association, the outstanding balance of cash that investors borrowed from securities firms for stock purchases amounted to 19.6 trillion won ($14.26 billion), Thursday, a day before the benchmark KOSPI topped the 3,000-point milestone for the first time since Dec. 28, 2021.

The index, after extending its upward trend for a fifth day, gained 44.1 points, or 1.48 percent, to close at 3,021.84 points, Friday.

The association explained that the outstanding balance of borrowed money for stock investment tends to reflect market sentiment.

Thursday’s amount marked a 758.4 billion won increase from June 13, which, according to the association, is “a noteworthy increase over just a week.”

It also pointed out that the outstanding balance reached nearly 20 trillion won for the first time since July 2024.

Separate data compiled by major commercial banks KB Kookmin, Shinhan, Hana, Woori and NH NongHyup showed their aggregated unsecured personal loans rose from 103.31 trillion won, May 31, to 104.4 trillion won, Thursday.

That 1.08 trillion won increase was higher than the 821.4 billion won increase throughout the entire month of May.

“Based on our analysis, a steep gain in unsecured personal loans is linked to an upward trend on the stock market,” a bank public relations official said, asking not to be named.

“We reckon that the tendency to buy stocks with borrowed money may become more distinct as the KOSPI surpassed the 3,000-point mark,” the official said.

Against this backdrop, Jung Eui-jung, head of the Korean Stockholders’ Alliance, said, “It is not very desirable to use someone else’s money to invest in stocks.”

He pointed out that the Korea Exchange asked investors to exercise caution on 1,107 trading cases — 248 on the KOSPI and 859 on the secondary exchange Kosdaq — from Jan. 2 to June 19.

The exchange operator expressed caution concerning cases of speculation on themed stocks, short-term price hikes and other highly risky investments.

The 1,107 cases are higher than the 1,057 in 2023 and 865 in 2024, each between Jan. 2 to June 19 of the corresponding year.

“KOSPI topping 3,000 points does not mean it will guarantee high returns, especially considering that the Lee government has not come up with concrete measures for market reform,” Jung said.

“If the new government’s reform measures fail to meet expectations, the market will face a downturn and inflict losses that investors with borrowed money can’t manage,” he added.