Securities firms near lending limit
Credit-fuelled stock purchases by individual investors are surging. According to the Korea Securities Dealers Association the amount of share purchases on credit reached 4.07 trillion won ($4.4 billion) as of Thursday.As stock market indices record new highs everyday, retail investors are borrowing money to invest in the stock market. The amount borrowed soared from 472.7 billion won on Feb. 1 to 1 trillion won on March 21 and then to 2 trillion won on April 18. Between April 18 and May 17, the amount almost doubled.
Stock purchases based on account receivable (or a delayed payment for stock) was practically banned on May 1, and retail investors turned to buying on credit from purchasing on account receivable. The former carries interest, the latter does not.
The regulations on account receivable purchases were toughened to encourage long-term investment. In the past, account receivable had to be reconciled within three days from the purchase date, but now it has to be resolved on the day of the purchase.
The balance of stock purchases on account receivable has now declined to 118.2 billion won from 475.6 billion won on May 2.
Lee said there is still room for stock purchases on credit, though securities houses have to limit how much they lend. The total amount of credit securities companies can extend is 4.5 trillion won, Lee said.
“Unlike banks, securities companies cannot lend as much because the source of the loan comes from the owner’s equity,” Lee said.
There is also a risk involved in buying on credit. “It increases leverage. Investors can earn profits if stock prices rise, but if they fall, losses investors sustain will be larger,” Lee said.
If the investors cannot pay back their loans within the term of maturity, which is normally 30 days to six months, securities companies have the right to sell the borrower’s shares to recoup the loans. The loans also incur interest of around 6 percent.
By Limb Jae-un Staff Writer [jbiz91@joongang.co.kr]
with the Korea JoongAng Daily
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