A market celebrated as a national success story has left ordinary investors counting losses and questioning whether the boom was ever sustainable.
South Korea, which sought to make its stock market a reflection of its technological and economic strength, has faced the painful consequences of market euphoria. The liberalization of rules and the emergence of risky instruments for active trading initially supported rapid growth, but the subsequent crash left many retail investors with heavy losses and psychological exhaustion.
The KOSPI index fell 30% from the peak recorded on June 19. This was a political blow to the government of President Lee Jae Myung and drew attention to a system in which retail investors poured money into complex leveraged products without always fully understanding the risks.
In South Korea, small stock market participants are often called “ants” because of their tendency to pile into popular trades en masse. The current crisis has raised questions over whether the country can claim developed-market status if investor behavior is accompanied by such sharp swings and widespread losses.
Ultimately, many of those who entered the market may have suffered serious losses, and most of them may be so traumatized that they lose interest in investing altogether.
– Jeon Suk-jae
Jeon Suk-jae runs an investment YouTube channel with 3.7 million subscribers. According to him, sentiment in the comments changed dramatically during the two months after the market peak: enthusiasm over quick profits gave way to anxiety and disappointment. One of his videos is titled “the entire country got drunk on stocks.”
The consequences of the market decline extend beyond financial losses – both realized and unrealized. Demand for psychiatric care is rising. In the city of Busan, police detained a man in his 20s suspected of attempting to murder a YouTube blogger: investigators say the suspect blamed him for his own stock market losses.
How South Korea Cleared the Way for Leveraged ETFs
Lee Jae Myung took office as president last year, promising to eliminate the so-called “Korea discount.” The term describes a situation in which shares of local companies are valued below those of international competitors because of the dominance of family-run conglomerates and corporate governance problems.
In January, regulators began discussing more complex investment instruments, including leveraged exchange-traded funds linked to the shares of individual companies. Such ETFs use financial derivatives to multiply the daily price movement of a particular stock.
These products were already popular among Korean investors trading on overseas exchanges, and the idea was supported by the presidential administration. Kim Yong-beom, the president’s chief policy adviser, asked why an instrument allowed on NASDAQ could not operate in Korea.
The discussions ultimately led to the launch of such ETFs on May 27. Within regulatory bodies, concerns were voiced about whether domestic investors sufficiently understood the risk of substantial losses. Nevertheless, the funds were approved. To gain access to trading, investors had to complete mandatory one-hour training and deposit at least 10 million won, or $7,208.25.
The presidential administration and economic ministries said they had assessed the risks before introducing leveraged ETFs on individual stocks. The Blue House stressed that the authorities would continue to support market stability. South Korea’s Financial Services Commission said there was no standardized risk assessment procedure, but various factors were analyzed at every stage.
AI Boom, Debt, and Record KOSPI Volatility
The launch of the new products coincided with the global artificial intelligence boom. Amid high demand for memory chips, Samsung Electronics and SK Hynix became companies with market capitalizations exceeding $1 trillion. This intensified the frenzy around Korean stocks and leveraged trading.
Financial influencers and commentators turned investing into one of the main topics of public discussion. Analysts described the rise in corporate earnings as a once-in-a-generation event. According to online bookstore Yes24, sales of books about the domestic stock market more than tripled from January to June.
Some retail investors who believed they had missed out on the AI boom began making increasingly risky bets in an attempt to earn money quickly. The volume of margin loans for KOSPI investments rose by about 75% from the start of the year through the end of June, reaching 30 trillion won.
On June 24, outstanding margin loan debt reached a record 29.8 trillion won, according to the Korea Financial Investment Association. Investors explained their willingness to borrow by saying they felt it was perhaps the only way to improve their financial circumstances amid the greatest wealth inequality in the country’s history.
Although it is reckless, leveraged or margin trading is the only way to climb even a little way up a broken ladder.
– Kwon Soon-kuk
Thirty-four-year-old investor Kwon Soon-kuk said his returns reached 66% at the market peak. Park Jung-jae, a professor of economics at Yonsei University, linked the herd behavior of traders to previous economic shocks that heightened the fear of missing out on a profitable opportunity – FOMO.
At the same time, foreign investors reduced their positions during the rally as they rebalanced their portfolios. On some days, the KOSPI rose by 5–8%, even though by the time leveraged ETFs were launched, the index had already more than doubled from its October level and surpassed 8,000 points.
The new ETFs amplified price movements in both directions, as the funds must actively trade stocks and derivatives to maintain their target leverage. Another risk factor was the heavy weighting of Samsung and SK Hynix: together, they account for more than 53% of the KOSPI’s total value.
At the beginning of July, sentiment changed sharply. The VKOSPI volatility index, known as the “Korean fear index,” jumped to 97.99 – the highest level since data collection began in 2009. In a client note dated July 28, Citi estimated retail investors’ losses on leveraged ETFs at $38.7 billion.
Episode after episode, ordinary people under severe financial pressure are lured into increasingly risky games by the promise of a life-changing payout, but ultimately they lose everything.
– Chun Wang
Chun Wang, director of multi-asset strategies at Leuthold Group, compared the history of speculative bets in South Korea to the series “Squid Game” in a note dated August 7.
Psychological Losses and a Crisis of Confidence in the Korean Market
The stock market crisis has taken on not only an economic dimension, but also emotional and political ones. Park Jongsuk, a Seoul psychiatrist who works with patients experiencing investment-related stress, said that last year he saw seven or eight such people a day.
But since June this year, their numbers have risen sharply again. I am currently treating an average of 11 patients a day.
– Park Jongsuk
Some Korean investors returned to the U.S. stock market after the KOSPI decline. According to the Korea Securities Depository, demand for U.S. leveraged ETFs remains high.
Politicians have already apologized for the situation, and the authorities introduced new restrictions on individual investments in such funds. However, confidence in the local market remains damaged. The inclusion of the KOSPI in global index provider MSCI’s list of developed markets was one of the key goals of the Lee Jae Myung administration.
Analysts believe that sharp volatility could worsen South Korea’s perception among foreign investors, although measures aimed at addressing the “Korea discount” have generally been viewed positively.
However, because volatility rose too sharply before the results of corporate governance measures had fully taken hold in the market, it will be difficult for foreign investors to make long-term investments.
– Huh Jae-hwan
Huh Jae-hwan, an analyst at Eugene Investment Securities in Seoul, pointed to risks for long-term capital. Although the KOSPI is still trading at more than twice its October level, some investors have lost faith in the Korean stock market.
I have invested in stocks for 30 years, but I have never experienced anything like this before. I do not think I will ever invest in the KOSPI again.
– Dalbo Park
Dalbo Park, a retiree in his 80s, lost 35% of his investments during the sell-off. His story reflects a broader problem: after a period of mass optimism, South Korea must rebuild not only stock prices but also people’s trust in the investment market.
