[Why&Next] Debt Disputes Rise Amid Rally 'Already 20 Trillion'... Theme Stocks Margin Trading Surges

Credit Trading Loan Balance Nears 20 Trillion Won
Increase in 'Debt Investment' Amid Expectations of Additional Stock Market Rally
Risks Accompany Credit Trading: "Beware of Forced Liquidation"

Recently, as the KOSPI surpassed the 2800 mark, 'debt investment (borrowing to invest)' has been on the rise. In the securities industry, there is a growing consensus that margin trading on stocks with rapid short-term fluctuations should be approached cautiously, within the limits of one's ability to cover principal and interest.

Debt investment rises amid expectations of further gains... Many stocks with high volatility

According to the Korea Financial Investment Association on the 11th, as of the 9th, the outstanding balance of margin loans stood at 19.8854 trillion KRW. On the 13th of last month, it surpassed 20 trillion KRW for the first time this year, marking a yearly high. The outstanding balance of margin loans exceeding 20 trillion KRW occurred for the first time in about nine months since September last year, when the secondary battery investment boom was at its peak.

The outstanding balance of margin loans refers to the amount investors have borrowed from securities firms for stock investments and have yet to repay. A continuous increase in this amount indicates that investors are increasingly engaging in 'debt investment' and accumulating unpaid loans.

The recent increase in margin trading is interpreted as a result of the KOSPI breaking through the 2800 level and the surge in thematic stocks such as K-Food, K-Beauty, and K-Oil Producing Countries, leading many investors to expect further gains in the stock market.

In fact, the KOSPI has steadily risen about 18% since the beginning of the year compared to the low point in January. On the 9th, it reached an intraday high of 2875.37, marking the highest level in two years and six months since January 2022, spreading expectations for an additional rally in the second half of the year.

By stock, the increase in margin trading was particularly notable in thematic stocks that have experienced repeated sharp fluctuations. The outstanding margin loan balance for Samyang Foods, the leading K-ramen stock that sparked the global 'Buldak (spicy chicken) craze,' was 83.616 billion KRW as of the 9th, a 154% increase compared to one month earlier (32.793 billion KRW). Among K-Beauty related stocks, Silicon투, whose stock price rose more than 400% since the beginning of the year, saw its margin loan balance increase by 114% to 38.373 billion KRW during the same period. Additionally, margin loan balances for Crown Confectionery (134%), Tony Moly (129%), Haitai Confectionery & Foods (126%), Lotte Wellfood (38%), as well as Nexteel (120%) and POSCO International (52%), which are related to the East Sea oil field theme, also increased significantly.

Margin trading is a double-edged sword... "Beware of forced liquidation"

Experts advise that the recently resurging margin trading is a tool that can amplify investment returns but also carries inherent risks, making it a double-edged sword. A financial investment industry official said, "Using leverage on investments you are confident about can be an opportunity to generate significant returns relative to your own capital, but you must consider the accompanying risks. If the stock prices of some thematic stocks and short-term high-flyers, which have attracted investment through debt, suddenly fall, forced liquidation can exacerbate the decline."

Forced liquidation refers to the process where a securities firm forcibly sells stocks when an investor using margin loans fails to maintain the collateral maintenance ratio due to a sharp drop in stock prices or cannot repay the loan within the credit period, in order to prevent further losses. When forced liquidation is executed, orders are placed at the lower limit price based on the previous trading day's closing price, triggering forced sales. Because orders are placed at the lower limit price, a sharp drop in stock prices can lead to a vicious cycle of further forced liquidations.

Since margin trading is concentrated in highly volatile, high-risk stocks, there are calls for caution as it can lead to unexpected large losses. An industry insider said, "Particular caution is required for individual investors using margin loans. It is necessary to accurately recognize the investment risks associated with margin trading and to execute investments that match one's risk tolerance." He added, "Margin trading should be recognized as a form of artificial demand. Especially, short-term and speculative use of small-cap, highly volatile, high-risk stocks should be avoided."

Furthermore, as debt investment surges due to the 'FOMO (Fear of Missing Out)' mentality in a rising market, there are opinions on the need for institutional improvements to support sound investments by newly entering individual investors. Kim Min-gi, a research fellow at the Korea Capital Market Institute, said, "Some individual investors, especially younger ones with limited investment experience and capabilities, buy stocks by following others out of anxiety that prices will rise further." He added, "In addition to traditional education methods emphasizing financial knowledge, ways to practically change investment behavior should be devised." He also suggested, "Continuous and systematic education to help understand the characteristics of stock investment and one's own investment capabilities is necessary."