Leveraged bets haunt investors and the entire market

Finance

Published: 23 Aug. 2021, 19:25

Leveraged bets haunt investors and the entire market

Leveraged punters are on pins and needles as stocks continue to trade down.

One 39-year-old office worker says he is stressed lately as the shares he bought last month continue to plummet. A Kospi-listed shipbuilding-related company he bought is down 28 percent.

To make matters worse, he bought the shares on margin. He deposited 20 million won ($17,000) at a brokerage and borrowed 15 million won from the brokerage to purchase the stocks.

"I borrowed on hopes of increasing capital in a short time," he said. "But now I'm agitated every time the stocks plummet."

The market could be set for a downward spiral. Brokers may soon be forced to sell shares bought on margin as their prices drop, putting more pressure on the market and further driving down share prices.

According to data from the Korea Financial Investment Association (Kofia) on Sunday, the balance of margin loans for Kospi and Kosdaq shares was 25.4 trillion won as of last Thursday. That is a 32-percent increase from the 19.2-trillion-won balance at the end of last year.

Last Wednesday, the balance reached 25.6 trillion won, which is a record high.

For margin trading, an investor pays roughly 40 percent of the money needed for stock trading and borrows the rest from a brokerage.

Brokers who make margin loans to customers have to unload shares when the losses incurred on the position gets too close to the amount invested.

Stock trading on short-term credit has also been increasing. According to Kofia, uncovered short-term credit reached 444.2 billion won Thursday. The credit has increased by about 129.3 billion won just this month.

Trading with uncovered-short-term credit is similar to margin trading, but with short-term credit, investors only have three business days to pay back their loans. It is a scheme mostly used by retail investors for aggressive investment.

The problem arises for investors that borrowed to invest when stock prices fall.

In the case of margin trading, most brokerages state in their contracts that they will sell shares bought on margin if the stock's value falls below 140 percent of the money deposited by the investor for the trade.

For instance, if an investor bought 20-million-won worth of stock with 10 million won of his own money and 10 million won borrowed from the brokerage, the brokerage would sell stocks for margin covering if the value of the shares falls to below 140 percent of the money committed by the investor. So if the value of the shares drops below 14 million won, the broker sells.

Of shares bought with uncovered short-term credit, 42.2-billion-won worth was sold off for margin covering by brokerages last Thursday. That was the most for covering among uncovered short-term credit in 13 years, since 42.9 billion won recorded on Oct. 27, 2008. This means more people were unable to pay back loans to brokerages within three business days.

For margin trading, there is no statistics for how much has been sold for margin covering.

Some analysts say that the risk of margin covering is not yet very big considering the movement of local stock market indexes.

Kospi on Friday closed at 3,060.51. That was a 6.7 percent fall compared to 3,280.38 on Aug. 4, before the stock market started plummeting. Kosdaq fell to 967.9 on Friday, down 8.7 percent since hitting 1,060 on Aug. 9, which was the year's high.

"If the Kospi falls below 3,000, there will be massive offloading for margin covering," said Pyun Deuk-hyun, vice president of asset management strategy at NH Investment & Securities. "Based on stock prices, guidelines differ by brokerages, but normally if a certain stock's price plunges by 30 percent, brokerages would sell for margin covering."

Stocks retail investors bet on with margin trading were mostly large caps, according to Koscom, an IT services provider 76.6 percent owned by the Korea Exchange.

Samsung Electronics had the largest margin account balance, at 941.8 billion won, followed by Celltrion, at 544.8 billion won, and SK hynix, at 483.8 billion won.

BY HWANG EUI-YOUNG, KIM JEE-HEE [kim.jeehee@joongang.co.kr]