Stock investors rush to take loans in bullish market

The number of people taking out loans to purchase stocks reached a record eight-year high, as investors rush to participate in a strong local stock market, data showed Thursday.

Margin debts, which refers to how much securities companies loan to customers to buy stock, reached 6.97 trillion won ($6.4 billion) as of Wednesday, according to the Korea Financial Investment Association. This is a record high since the figure hit 7.1 trillion won in June 2007, and a significant jump from the 5.77 trillion won at the end of 2014.

During the first quarter, domestic brokerage houses followed suit and lowered their rates to attract more capital into the equity market, particularly following the Bank of Korea’s move to cut its key interest rate to a record-low 1.75 percent, according to KOFIA.

“This means that an increasing number of investors are willing to take loans in order to participate in the stock market and to profit from its bullish trend,” said an official.

A rapid influx of liquidity was more visible in the over-the-counter KOSDAQ sector than in the benchmark KOSPI, as small and mid-sized companies in bio and information technology made significant progress.

Margin debts for KOSPI have risen 27.4 percent, from 2.5 trillion won at the beginning of the year to 3.2 trillion won as of Wednesday. The corresponding figure for KOSDAQ rose by 47.3 percent during the same period.

Financial authorities claim the increasing rate of debt is keeping pace with market capitalization and customer deposits. But market observers warned that excessive debt, especially in KOSDAQ, may disturb the market’s stability.

“A majority of the margin debts are currently concentrated on small capital stocks in KOSDAQ, which is unusual, considering that KOSDAQ is about an eighth the size of KOSPI,” said Kang Hyun-cheol, head of investment strategy unit at NH Investment and Securities.

Debt-driven investments are also likely to be short-term and volatile, which could disrupt the predictability of the market, experts said.

By Bae Hyun-jung (tellme@heraldcorp.com)