Stock loans are risky, but can ease stagnant market
A 30-year-old employee, identified only as Mr. Kim, has been called a “stock trading genius.”Kim noticed in January that foreign investors were dumping shipbuilding company shares, in which Mirae Asset Group invested heavily last year.
Kim believed that if shipbuilding shares fell, Mirae’s share price would fall, too. Kim thought about a stock loan, which was revived for individual investors on Jan. 21.
A stock loan occurs when an investor sells stocks borrowed in advance without actually completing the purchase. The investor can buy the stocks later and pay back what he borrowed, a practice often used when the price of a certain issue is expected to fall.
Mirae Asset’s stock price increased to 150,000 won ($157) on Jan. 23. Kim borrowed 100 shares and sold them on the same day. On Jan. 30, Macquarie Securities issued a report that downgraded Hyundai Heavy Industries Company, lowering its target price by 60 percent. When the share price plunged, so did Mirae Asset’s. Kim bought 100 shares of Mirae for 110,000 won per share. In 10 days, he made 4 million won.
Foreign and institutional investors have been allowed to use stock loan, but individuals cannot. The practice was forbidden for retail investors in 1986 because the government was afraid of overheating stock trading.
It was revived because of the surge in stock prices last year. When individual investors’ stock purchase on short-term credit climbed last year on the back of a booming stock market, the government barred credit purchases. Instead, a stock loan was allowed for individual investors.
“If stock loans are made possible, investors can cope with a stagnating stock market,” an analyst said.
Now Goodmorning Shinhan Securities, Hyundai Securities and Kiwoom Securities lend stocks to individuals but there will be 10 more brokerages with stock loan programs.
If an investor has 400,000 won as a deposit in his brokerage account, he can borrow 1 million won worth of stocks for 60 days. Borrowed stocks must be sold on the same day they are borrowed. There is a limit on stock loans of about 100 million and 1 billion won, depending on brokerages.
However, experts say a stock loan can be as dangerous as buying stock on credit. “Investors could suffer huge losses,” said Kim Hak-gyun, a senior analyst at Korea Investment and Securities.
By Jung Kyung-min JoongAng Ilbo [jbiz91@joongang.co.kr]
with the Korea JoongAng Daily
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