Margin loans are risky business as Kospi stalls

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Margin loans are risky business as Kospi stalls

Despite rising speculation that the Korean central bank will soon raise interest rates and generally sluggish stock markets, the number of people purchasing stocks with borrowed money is on the rise.

According to the Korea Financial Investment Association on Monday, the balance on margin loans as of April 3 amounted to 6.52 trillion won ($6 billion) for the benchmark Kospi and 6.24 trillion won for the secondary Kosdaq. When combined, the balance amounts to 12.3 trillion won.

Margin loans are a type of investment where investors borrow from brokerage firms to purchase stocks. Investors pay the brokerage firm the principle and interest with any profit, while pocketing whatever is left.

If the investor fails to pay off the loan and interest, the brokerage firm forces them to sell their stocks in an effort to recover the losses.

Such investments have been seeing an increase despite the relatively sluggish markets. The balance of margin loans, which amounted to 10 trillion won in November, reached 11 trillion won in January and 12 trillion won as of last month.

Margin loans have been gaining momentum since last year when the markets were moving positively, backed up by a bullish rally of biopharmaceutical company shares including major hitters like Celltrion.

But recently the local stock markets have stalled, which could impose a heavy burden on investors as margin loans come with higher interest rates than a typical bank loan.

The average interest rate from the 32 brokerage firms in Korea is 7.4 percent for one month, 8.7 percent for three months and 9.2 percent for six months.

However, the average yield of stocks traded in the month leading up to May 4 was just 2.2 percent on the Kospi and minus 0.7 percent on the Kosdaq. When expanding to 3 months, Kospi stocks suffered a loss of 1.2 percent. The Kosdaq is down 0.2 percent.

If the central bank raises interest rates, it will likely spark further anxiety among margin loan investors.

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