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Taking out loans to invest in stocks is no longer tenable
The nation's top financial regulator has issued a consumer "caution" alert about the risks of "margin trading," the practice of borrowing money from a brokerage house and using it to buy stocks. The alert is the lowest among a three-stage notification system ― caution, warning and danger ― but it marks the first time that the Financial Supervisory Service (FSS) has raised alarm bells about margin buying.
Investors began buying stocks using borrowed money in droves last spring. As liquidity became plentiful following the Bank of Korea's interest rate cuts to cope with the fallout from the COVID-19 pandemic, investors rushed to buy huge amounts of shares with borrowed money. The outstanding balance of margin trading nearly quadrupled from 6.6 trillion won ($5.5 billion) at the end of March last year to 25.7 trillion won as of Sept. 13 in what appears to be an unprecedented investment craze.
What's surprising is that many investors are not aware of how risky margin trading can be. Buying on margins is very tempting due to the potential of higher returns. But margin trading is a form of leverage, so losses can be huge if the investment doesn't go as planned. In fact, the monetary amount of daily forced liquidations more than doubled from 4.22 billion won in July to 8.48 billion won in August when stocks remained weak overall.
In a financial stability report Friday, the central bank hinted at another interest rate hike to address worsening financial imbalances. Next month, the financial authorities also plan to announce additional measures to rein in household debt, which could make it increasingly difficult for individual investors to borrow money for stock investments. Furthermore, FSS Governor Jeong Eun-bo urged the nation Tuesday to brace for an economic "perfect storm," citing a mixture of financial risks from corporate and individual insolvencies and asset price bubbles. All things considered, taking out loans to invest in stocks or real estate is no longer tenable.
