Retail investors flock to meme stocks in pursuit of short-term gains

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The South Korean stock market is leaning towards meme stocks, or so-called theme stocks, as large-cap stocks remain stagnant. This is due to an influx of funds seeking meme stocks as an alternative investment when other options appear limited.

According to data from the Korea Exchange on Tuesday, retail investors accounted for 71.9 percent of the total trading volume this month, surpassing the 71.8 percent recorded in April, when they heavily traded large-cap secondary battery stocks amid concerns surrounding the overvaluation of Kosdaq leaders EcoPro Co. and EcoPro BM Co. This month, smaller- and mid-cap stocks such as Hana Micron Inc. have also made it into the top 10 in terms of total trading volume.

Retail investors have been flocking to thematic stocks, particularly as fresh capital from institutions and foreign investors has been subdued, and this shift suggests that market leadership is gradually transitioning to retail investors engaging with small- and mid-cap stocks. Although retail trades made up only 64 percent of the market in January this figure has risen with the onset of the bull market. Institutional trading accounted for 10 percent this month, with foreigners contributing 18 percent.

The Korea Financial Investment Association found that the balance of credit loans reached 20.49 trillion won ($15.4 billion) as of September 8, coming close to the year’s peak of 20.55 trillion won in mid-August, while investor deposits stood at 51 trillion won, showing only a modest 10 percent decrease from the beginning of August. This trend suggests that only meme stocks, which can bring short-term gains in a market with diminished expectations of index growth, remain highly active. Although market leader Samsung Electronics Co. saw its stock price surge in response to news that it would supply high-bandwidth memory (HBM) to Nvidia, the gains were short-lived.

Recently, meme stocks have been characterized by their diversity and short-term nature, unlike in the past when they were often tied to political events. After the surge in superconductors as a meme stock in late July, investors swiftly turned their attention to stocks related to Maxine, a two-dimensional inorganic compound, in mid-August, followed by quantum computers and seafood in late August, and artificial intelligence (AI)-based healthcare and obesity drugs in early September.

When a stock emerges as a meme, so-called “tips” on social media such as Telegram suggesting related stocks follow and leads to several small-cap stocks experiencing significant gains simultaneously. The life span of these themes is getting shorter, mirroring a shift in focus to stocks that are less likely to experience longer-term price increases. “Intense investigations into stock manipulation by financial authorities may discourage manipulators from sticking with a theme for an extended period,” according to an unnamed source from the financial investment industry.

Investing in theme stocks is undeniably risky, with certain gains fading within a single day. For example, robotics stocks, including Rainbow Robotics, initially rose strongly on Monday in the morning but lost the gains in the afternoon when news of Chinese President Xi Jinping’s visit to Korea broke.

Despite the inherent risks, brokerage firms anticipated that the meme stock market will continue to thrive. In a market where macroeconomic factors such as interest rates and exchange rates are unfavorable to foreign investors, retail investors wield substantial influence over supply and demand. “Given the high interest rates, rising oil prices, and a strong dollar, index-based investments remain limited,” Yuanta Securities Co. analyst Gang Dae-seok said. “The theme market will likely continue at least until the third quarter.”

The reopening of contracts for difference (CFDs) in September will also have an impact on the theme stock landscape. Investors utilizing CFDs tend to be highly leveraged retail investors who favor high-risk, high-return investments.