Volatility is both a crisis and an opportunity for stock investors. While some investors may be satisfied with minor fluctuations, many are betting on extreme swings. Predicting these fluctuations can lead to significant profits, which is why stocks are classified as relatively high-risk compared to bonds.
Recently, the volatility of the KOSPI index has reached unprecedented levels. After surpassing 8,800 on June 2, the index has dropped to the 7,700 range, marking a decline of over 1,100 points. This drop is based on closing figures, and intraday trading has seen the index fall as low as 7,400, causing considerable market turbulence. The emergence of the term "rollercoaster market" reflects this situation.
While it is encouraging that the Korean stock market is experiencing its highest boom in history, it is crucial not to overlook the cries of individual investors hidden behind the joy of reaching 8,000 points. The recent market behavior starkly highlights the risks associated with debt investment. As the KOSPI index fluctuates by hundreds of points in a short period, forced liquidations have exceeded 1 trillion won in the past month. Daily forced liquidation amounts have approached 170 billion won, with three consecutive trading days seeing forced liquidations surpassing 100 billion won. This creates a vicious cycle where falling stock prices lead to forced liquidations, which in turn cause further declines.
Even more concerning is the behavior of investors. When the market is unstable, risk management should be a priority; however, some investors perceive this as an opportunity for bargain hunting. The balances of overdraft accounts at the five major banks have surged to nearly 43 trillion won, the highest level in three years and seven months. Despite bearing interest rates around 6%, investors are still entering the stock market, driven by the expectation that future returns will exceed these costs. However, the market does not move on expectations alone. In a situation of extreme volatility, using debt for investment can amplify losses far more quickly than gains.
This issue cannot be dismissed as merely the reckless choices of a few investors. Financial authorities also bear responsibility. Since last year, direct participation by individual investors in the domestic stock market has significantly increased, along with a surge in margin trading and leveraged ETFs. While authorities have focused on market activation and expanding the investor base, they have been criticized for neglecting the risk management that excessive leverage can entail.
Particularly alarming is the excessive concentration of margin trading and leveraged funds in specific stocks like Samsung Electronics and SK Hynix. This concentration of debt investment can amplify gains during market upswings but becomes a source of instability during downturns. The recent activation of trading halts and circuit breakers can be attributed to this phenomenon of leveraged concentration.
Despite these circumstances, financial authorities rarely use the term "overheating." If the rising stock market is not merely a reflection of government success, it is time to strengthen the management system for market overheating and leverage risks. Authorities should review whether the current limits on credit provision and margin requirements are appropriate for the market situation and enhance warning systems when excessive credit funds concentrate on specific stocks or ETFs.
Above all, the attitude of market participants is crucial. While the belief that a bull market will continue always exists, historically, markets with excessive leverage have been shaken by minor shocks. Financial market crises have consistently begun with excessive optimism and debt, from the Dutch Tulip Bubble in the 1630s to the dot-com bubble in 2000 and the global financial crisis in 2008.
A bull market offers opportunities to investors, but debt does not allow time to seize those opportunities. The surge in forced liquidations and increased volatility in the current stock market is not merely a signal of market correction; it is a warning sign of risk that both investors and financial authorities must heed. While market vitality is important, it is essential to prioritize market stability and sustainable participation from investors.
* This article has been translated by AI.
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