KOR

Publications

Latest Publictions

보고서
2022 Jan/05
Retail Investors’ Margin Trading in Korea: Current State, Characteristics and Implications Issue Papers 22-01 PDF
Summary
Amid a massive inflow of retail investors to Korea’s stock market, margin loans have reported a steep rise in value since the Covid-19 outbreak. Margin trading could act as a double-edged sword both for the entire stock market and retail investors, which requires caution. Against this backdrop, this article intends to quantitatively examine the soundness of margin loans in Korea’s stock market, and to conduct a multi-pronged analysis of the characteristics of those engaging in margin trading based on retail investors’ margin transaction data.  

The results of the empirical analysis conducted by this article can be summed up as follows. First, although Korea’s amount of margin loans is lower than that of major economies, it has shot up quite rapidly since the spread of the Covid-19. Second, increases in outstanding margin loans are relatively concentrated in the small-cap, high-risk stocks that show high volatility. It is worth noting that the stocks that took up a high proportion of outstanding margin loans experienced a larger decline in prices amid the Covid-19 pandemic. Given this, when downward pressure on the stock market mounts, high-risk stocks are likely to face rising volatility. Third, although Korea’s retail investors who buy stocks on margin account for a small proportion at 5.5%, a number of small investors with low risk tolerance levels show a tendency towards margin trading. The analysis result reveals that if trading costs are taken into account, investors who buy stocks on margin underperform other retail investors. In particular, small investors tend to obtain a far lower rate of return, implying that their loss may rise even further presumably due to margin trading. Fourth, it has been analyzed that despite their good financial standing, those who use margin loans bear greater investment risk, which can be attributable to a large proportion of high-risk stocks and less diversified portfolios. Notably, investors who buy stocks using borrowed capital exhibit an extremely speculative, short-term investment behavior, as evidenced by their trading frequency three times higher than that of ordinary retail investors. As speculative behavior is especially evident in new entrants, younger investors and small investors, it can be assumed that the poor performance of investors engaging in margin trading stems from behavioral biases such as overconfidence. 

Margin trading can be seen as speculative demand and thus, investors should remain cautious about using margin loans excessively since it could threaten the stock market stability and incur heavy losses. Considering that some of the margin loan users are not capable of properly using leverage, retail investors should understand exactly the risk posed by margin trading and respond to potential investment risks.