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FSS urges retail investors to shun loan stock buying

(Yonhap)
(Yonhap)

The Financial Supervisory Service on Tuesday cautioned local retail investors to refrain from borrowing money when investing stocks, pointing at the excessive market volatility.

In a rare message, the financial regulator noted that the current market condition is somewhat different from the 2008 global financial crisis, stressing that it has become more unpredictable than before.

“Some existing investors think that now is the time to purchase undervalued shares, since they have seen equities being sharply rebounded after the financial crisis. And some new investors have started stock trading without acknowledging inherent risks in the market,” FSS wrote in a statement.

“A higher expected rate of return involves greater risks. Investors need to consider that high return rates from the past can’t guarantee positive future results,” the statement added, advising investors to diversify their portfolios.

The FSS also highlighted that investors need to invest in the long term with their residual funds. If they invest in the market with their short term capital such as property lease deposits and tuition fees, they might face difficulties to utilize the funds amid possible losses.

The watchdog further warned of leveraged investing -- the strategy of using borrowed money from various financial instruments to generate additional investment returns -- due to high interest rates and possibility of expanding substantial amount of losses when stock prices fall.

Individual investors’ combined net buying marked about 25 trillion won ($20.4 billion) in the first quarter this year. The January and February figures came to 6.3 trillion won and 6 trillion won, respectively, while March recorded 12.7 trillion won.

In line with the drop in the main bourse, the official representative volatility index for the Kospi 200 marked 48.6 at the end of last month -- surging by 29.3 from the end-January, according to the Korea Exchange.

Meanwhile, local stocks erased part of earlier gains early Tuesday afternoon as investors cashed in part of recent gains.

The benchmark Kospi rose 31.72 points, or 1.77 percent, from the previous session, to close at 1,823.60. The market began strong at 1,826.72, tracking overnight gains on Wall Street, but as foreign investors turned to net sellers on profit-taking from a rebound market, the index slightly slid down.

The tech-heavy Kosdaq also got off to a solid start at 606.21. The index fluctuated between gains and losses throughout the day to close at 606.90. The local currency closed at 1,221.20 won against the greenback -- up 8.10 won from the previous session’s close.

By Jie Ye-eun (yeeun@heraldcorp.com)
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