Forced liquidation further weighs over Kosdaq due to increased margin trade

2022.09.28 11:35:25 | 2022.09.28 14:31:46

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Leveraged stock investment by retailers has lately increased mostly at high-yield and high-risk Kosdaq to raise that much of liquidation and burn risk for investors and fuel the down spiral for the secondary market at its 27-month lows.

As of Tuesday, 193 or 12.9 percent of 1,499 Kosdaq members showed leveraged ratio of more than 5 percent, according to the Korea Exchange.

The outstanding balance in margin accounts came to 18.89 trillion won ($13.2 billion) as of Monday. The balance in borrowed funds for stock investment that fell to the 17 trillion won level in July from 23 trillion won in the beginning of the year has recently risen and nearly half or 8.86 trillion won headed for tech-heavy Kosdaq. The leveraged amount is huge as market cap of Kosdaq is at 316 trillion won.

Most of leveraged investment targeted small-cap defense, robot and nuclear reactor related stocks that have recently ascended on global order boon.

Among bigger-cap Kosdaq stocks, printed circuit board manufacturer Simmtech reported a margin ratio of 5.95 percent, game publisher Com2uS 5.5 percent, pharmaceutical company Sam Chun Dang Pharm 5.47 percent, and Bioneer 6.12 percent.

Without clear signs of a recovery in corporate earnings and the economy, the aggressive buying on margin could pose a greater risk to investors because such high-leverage investment magnifies not only profits but also that much of losses for investors.

Losses could be snowballed rapidly when the value of stocks in their loan accounts declines. The plunge in the stock value below the maintenance margin level triggers a margin call in which brokerage firms can force the account holders – or borrowers – to liquidate the shares. Since they are sold 20 to 30 percent below the previous closing prices, greater downfall in stock prices is inevitable.

Retailers sold 16.3 billion won worth on the Kospi and 174.9 billion won worth on the Kosdaq on Tuesday alone.

Margin accounts failing to keep up with adequate maintenance level jumped 45 percent on a single day last Friday.

The Kosdaq index has slipped under 700 on Monday for the first time since June 2020.

By Park Yoon-ye, Kang Min-woo and Lee Ha-yeon

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