[Gangnam Perspective] The Iron Rules of Stock Investment

Investing with borrowed money is a combination of conviction and bold decision-making. However, the price of overconfidence and misjudgment can be devastating, leading to frustration and regret. In the stock market, such leveraged investing is closer to speculation than investment, and even experts generally consider it taboo. Recently, a high-ranking financial regulator broke this unspoken market rule. Remarks suggesting that 'leveraged investment can be viewed as a form of margin trading' spread through the market. Although the comment was qualified by the need for portfolio management within tolerable risk levels, it sparked controversy over whether such an opinion was appropriate from a financial regulator, especially at a time when margin loans have reached record highs and market caution is mounting. Coincidentally, the Korea Composite Stock Price Index (KOSPI), which had been soaring, subsequently plunged by about 300 points.
Compared to real estate, the risks of leveraged investment in the stock market are far greater in terms of investment period, interest costs, and price volatility. Margin loans are a prime example. While terms vary by securities firm, investors can generally borrow up to 2.5 times their own funds with a collateral ratio of around 140%. However, the obligation to repay within a maximum of 180 days is a significant burden. If stock prices decline, the collateral ratio drops, triggering a margin call for additional collateral. Failure to meet this requirement results in forced liquidation at a price 15–20% below the previous day's closing price as soon as the market opens. In some cases, this can even affect one's credit rating. Margin transactions, often called 'ultra-short-term leveraged trades' with a three-day settlement period, are not much different. Currently, outstanding balances from such margin transactions have grown to nearly one trillion won, reflecting a clear rise in short-term credit trading.
Unlike real estate, where loans are strictly limited by the Debt Service Ratio (DSR) and Loan-to-Value Ratio (LTV) and typically repaid over 20 to 30 years, margin loans in the stock market are fundamentally different. The interest rates on margin loans are also steep. The average 90-day rate at the top 10 securities firms is about 9% per year, and it exceeds 11% for longer periods.
Compared to the upper end of commercial bank mortgage rates at around 6%, margin loan rates can be up to twice as high. In addition, stock prices can fluctuate by as much as 60% in a single day, with daily limits of 30% up or down. Real estate prices never swing this wildly in a day. Especially for single-home owners, the primary motivation is usually residence, not investment. While one can live without stocks, it is much harder to live without a home. In Korea, only a handful of wealthy individuals can buy a home without borrowing. Although borrowing to invest is generally viewed negatively in society, short-term, high-cost, high-risk leveraged stock investment is far riskier than real estate leverage.
The surge in margin trading in the stock market could become a ticking time bomb for household debt. According to the Bank of Korea (BOK), household credit—including loans and credit card debt—reached a record 1,968.3 trillion won at the end of September this year, the highest since statistics began in 2002. Since October, household credit at the five major commercial banks has increased by more than five trillion won, putting the 2,000 trillion won mark within reach for the first time ever. As of the 20th of last month, unsecured loans at these banks exceeded 106 trillion won, rising by more than 1.3 trillion won in less than a month. Analysts believe a significant portion of these funds has flowed into the stock market. At present, concerns about principal loss outweigh hopes for profit. With the market experiencing sharp fluctuations this month, the volume of forced liquidations due to falling stock prices—regardless of investors’ intentions—has surged rapidly. In fact, as of the 20th, the Korea Financial Investment Association (KOFIA) reported that the cumulative amount of forced sales due to margin transaction defaults had already reached 218.2 billion won, setting a new annual record.
The leverage effect only works when the fulcrum (principal), force (debt), and point of application (rate of return) are properly aligned. If the fulcrum is unstable or the force and application point are misaligned, the lever cannot transmit force effectively, resulting in instability or failure to achieve the desired outcome. If the lever breaks, it would have been better not to use it at all. Therefore, it is crucial to examine everything thoroughly and carefully before applying leverage. This is especially true in financial markets where large sums of money are at stake. 'Invest only with surplus funds...'—this is not a rule known only to journalists.
winwin@fnnews.com Reporter