Forced liquidation hits 6-month high amid growing stock margin trading

2023.03.14 12:19:01 | 2023.03.14 12:20:49

[Photo by MK DB]이미지 확대

[Photo by MK DB]

Individual investors in South Korea have increasingly relied on debt to invest in stocks in the volatile market, leading to an increase in forced margin liquidation.

According to the Korea Financial Investment Association on Monday, investment deposits grew by 4.22 percent to 49.88 trillion won ($38.21 billion) over the past month until March 9. The balance of margin transaction, where individuals use their stocks as collateral to borrow money from securities companies to buy more stocks, reached 18.13 trillion won as of March 9, the highest level in six months since Sept. 27. An increase in the balance of margin trade indicates that more individual investors believe they can make money in the stock market.

However, as the amount of debt-fueled investment increases, the stock market has been sluggish since February, leading to a rise in forced margin liquidation. This happens when securities companies forcibly sell pledged stocks when the valuation of stocks falls below a certain level, 140 percent of the stock collateral ratio, after they lend money to investors. Such liquidation hit the highest level in six months, reaching 26.7 billion won on March 7.

The amount of brokerage receivables, which is exposed to forced liquidation depending on market conditions, surged by 25.19 percent to 204.9 billion won as of March 9.

Brokerage receivables are short-term loans that brokerages lend for three days when an investor falls short of paying for stock purchasing. The ratio of forced liquidation to such receivables was 14.3 percent on March 7, the highest in six months since Sept. 28 when the figure was 20.1 percent.

“It is premature to expect a trend uptick in the stock market without stability in inflation and a shift in monetary policy,” said Yoo Seung-min, an analyst at Samsung Securities Co. “Investors should increase their cash allocation to prepare for uncertainty.”

As securities firms cut interest rates on credit loans due to pressure from financial authorities, retail investors who feel less burdened in borrowing are increasingly investing in stocks with debt. Recently, Kiwoom Securities Co. lowered its credit loan interest rate by up to 2.1 percentage points and Shinhan Securities Co. cut its short-term interest rate to 3.9 percent from 5.05 percent per annum.

Analysts have warned that debt-based investment is risky as market uncertainty remains high until the end of the Federal Open Market Committee meeting, scheduled for March 21-22. They expect downward pressure on the stock market to increase during this period.

“The interpretation of every piece of data to be released before the FOMC meeting and the high volatility that comes with it will make stock trading difficult,” said Han Jae-hyuk, an analyst at Hana Securities Co. “With more bad news than good, it would be a good strategy to take a break from trading.”

By Kim Je-gwan and Minu Kim

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