Korea’s market sees surge in margin trading driven by those in 40s, 50s

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Korea’s individual investors have turned to margin trading again on the back of the rally in the local stock market this year with new margin loans to buy stocks more doubling compared with the beginning of this year.

According to data obtained from the Financial Supervisory Service by representative Oh Gi-hyoung of the Democratic Party of Korea on Monday, the amount of new margin loans used to buy stocks reached 42.46 trillion won ($33.5 billion) in April, up as much as 97 percent from 21.52 trillion won at the beginning of the year. The figure steadily increased, reaching 31.26 trillion won in February and 39.32 trillion won in March.

The outstanding margin debts are also increasing. According to the Korea Financial Investment Association, the volume of outstanding debts was 19.28 trillion won as of Thursday, up 16.7 percent from 16.52 trillion won at the end of last year. In particular, the outstanding debts in the Kosdaq market stood at 10.47 trillion won, outgrowing that in the Kospi at 9.77 trillion won.

The amount of new margin loans used to buy stocks refers to the combined amount used by individual investors when buying stocks through borrowing from securities firms. Concerning individual investors who tend to buy and sell stocks frequently, the figure is normally bigger than the outstanding debts.

In a bull market, the influx of margin trading can further boost stock prices. Many popular stocks this year, including EcoPro Co. and EcoPro BM Co., have seen their share prices skyrocket due to the increase in margin trading. However, the large amount of credit could threaten those investors with potential forced margin liquidation when the stock market enters a bear market.

In the first five months of this year, new margin loans used for stock trading totaled 162 trillion won, up 52 percent year-on-year. In 2022, the figure totaled 309 trillion won, down 23 percent compared to 402 trillion won in 2021. However, analysts say the figure will rebound this year.

In May, the figure by security firms fell to 27.27 trillion won, which is believed to be attributed to the aftermath of the Societe Generale Securities scandal at the end of April. Following the stock price collapse driven by the scandal, investment sentiment was frozen as securities firms raised their margin rates and suspended margin loans.

“Securities firms have resumed margin after the SG Securities scandal subsided. Given that outstanding margin debts have been increasing since then, new margin loans used for stock trading must have increased significantly,” said an unnamed industry insider.

By age group, investors in their 40s and 50s are the most active in margin trading, with investors in their 40s accounting for 27 percent and investors in their 50s accounting for 34 percent among all age groups. In terms of amount, those in their 40s accounted for 43.88 trillion won, and those in their 50s accounted for 54.25 trillion won, while those in their 20s accounted for 5.28 trillion won and those in their 30s for 23.54 trillion won. In the first five months of this year, people in their 40s had the highest number of new overdrawn account openings, as well as the largest balances, with 34,000 new openings and 1.4 trillion won outstanding, respectively.

In line with the increase in margin trading, the interest burden is also expected to increase. Securities firms use the market interest rate as the base rate and add a markup to set the interest rate for margin loans. The 91-day certificate of deposit rate, frequently used as the benchmark at most securities firms, rose to 4 percent at the end of 2022 from 1 percent at the beginning of that year. Currently, the rate is standing around 3.75 percent.

As of the end of 2022, Kiwoom Securities Co. had the largest amount of new margin loans used for stock trading, with 81.94 trillion won, followed by Mirae Asset Securities Co. with 38.19 trillion won, KB Securities Co. with 35.88 trillion won, Samsung Securities Co. with 31.53 trillion won, NH Investment & Securities Co. with 31.39 trillion won, and Korea Investment & Securities Co. with 16.6 trillion won.