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The benchmark Korea Composite Stock Price Index has surpassed the 1,800-point mark after several consecutive days of surging share prices. On Tuesday, the KOSPI closed slightly higher even though investors spent much of the day selling shares, burdened by the fact that the index closed up 34 points on Monday. The KOSPI has risen about 26 percent since the beginning of the year and is up 20 percent since exceeding the 1,500-point mark on April 9.
The reasons the stock market is red-hot are ample liquidity and the strong growth momentum of the U.S. and global stock markets. Consumer deposits, which are stand-by funds for stock investments, have risen by more than W5 trillion (US$1=W938), while deposits to stock investment funds have grown W13 trillion. Money is moving over to the stock market now that hefty taxes have been levied on the real estate market. Another factor fueling the bull market are expectations that the Korean economy has entered a recovery after bottoming out in the second quarter, with hopes that corporate earnings will improve as well.
When stock prices go up, investors make more money and spending rises, thereby speeding up an economic recovery. But there are concerns that an overheated stock market could lead to more negative side effects than benefits. There are worries that the stock market is growing faster than the rate of economic recovery.
Since April, individual investors have played a large role in boosting share prices. Individual investors have accounted for 70 percent of the money that went in and out of the stock market in recent weeks, much higher than the 47 percent level at the end of last year. The money individual investors borrow from brokerages to invest in stocks rose from W497.7 billion at the end of last year to W6.2 trillion recently. There appears to be more and more people putting up their houses as collateral or borrowing from banks to invest in stocks. These are common phenomena when the stock market overheats.
When individual investors play a large role in the stock market, fluctuations become more frequent and the social impact is greater as well. Investors must never forget that they are responsible for the risk they face. And the government must be careful that an overheating stock market does not create a burden on the economy.
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