Risk fears raised as individuals borrow to fund stock buys

Brokerage firms’ collective loans to investors, which are stock investment-oriented credit, reached the highest level this month on the KOSDAQ market amid the bullish secondary bourse and record-low bank interest rates.

In a report released by Korea Financial Investment Association on Tuesday, the credit-based investments reached the risky amount of 3.97 trillion won ($3.64 billion) as of May 20. This accounts for about 3.5 percent of the entire capitalization of freely traded stocks on the tech-savvy KOSDAQ, according to the private nonprofit institution.

As a large portion of the credit-based investors are estimated to be individuals, concerns are growing over the possibility that many small investors could see heavy losses or overdue payments should foreigners or corporate investors become active net sellers in the coming weeks to realize their gains.

Since the previous record in 2007, the credit-based investment ratio has made a steady increase, reaching about 3.1 percent at the end of 2014.

Amid a flurry of increased retail investment in stocks related to bio and cosmetics, the secondary brokerage rose almost 30 percent this year, in contrast to the dwarfing interest gains on bank deposits.

Earlier on May 15, the Bank of Korea froze the key interest rate at a record-low 1.75 percent on the nation’s high household debt, struggling export and weak consumption.

Market watchers warned that the rising stock investment on credit may not end as a mere fad, as authorities will double the daily share price limit to 30 percent starting next month, driving small investors into risky investments on debt.

By Chung Joo-won (joowonc@heraldcorp.com)