One in four stocks flagged by the Korea Exchange under investment caution or investment risk designations lost more than 30% of their value about a month later, according to data released on the 20th. In many cases, retail investors bought into those stocks even as foreign and institutional investors sold.
Data submitted by the Korea Exchange (KRX) to the office of Rep. Park Sung-hoon of the People Power Party, a member of the National Assembly's National Policy Committee, showed 1,548 cases of investment caution or investment risk designations between 2022 and August this year.
Investment caution designations accounted for the bulk of the total at 1,429 cases, while investment risk designations numbered 119.
The KRX operates a market alert system to flag risks to investors when it detects unusual trading signs, such as a sharp run-up in a stock price over a short period or trading heavily concentrated in particular accounts. The alert levels escalate from investment attention to investment caution and then investment risk.
Prices fell sharply in a substantial number of cases after the alerts were issued. Of the 1,548 cases, prices were lower 20 trading days after designation in 1,050 cases, or 68%.
Declines of 20% or more occurred in 636 cases. Drops of 30% or more were recorded in 398 cases. That means roughly one in four stocks designated as investment caution or investment risk had fallen more than 30% after 20 trading days.
The 119 cases designated as investment risk, the highest level of market alert, showed an average price decline of 15.6% after 20 trading days.
Even so, some retail investors actively bought the flagged stocks after the designations. Among 41 companies listed on the KOSPI and KOSDAQ that were designated as investment caution or investment risk in August, 13 saw net buying by individuals while foreign and institutional investors were net sellers from the designation date through the 18th, trading data showed.
That means retail investors moved in to buy in about one of every three flagged stocks as foreign and institutional investors trimmed their holdings.
The largest net buying by individuals was in Woori Technology. From the market alert designation on the 11th of last month through the 18th of this month, individuals bought a net 85.9 billion won ($62 million) worth of Woori Technology shares. Over the same period, foreign investors sold a net 49.2 billion won and institutions a net 36.6 billion won.
Retail buying also flowed into Sungho Electronics, where net purchases by individuals topped 22.9 billion won after the investment caution designation. Wonik Holdings followed with about 20.6 billion won in net retail buying, OE Solutions with about 14.6 billion won and Kumho Electric with about 13.4 billion won.
Against that backdrop, the KRX eased some of the rules applied to stocks under market alerts this year. After giving notice of proposed rule changes in April, the exchange scrapped a requirement that investors post 100% of the purchase amount in cash as a margin deposit when buying stocks designated as investment caution or investment risk.
The exchange said at the time that the step took into account criticism that the rules were excessive compared with global standards. It kept other curbs on overheating in place, including bans on margin trading and trading halts.
"A market alert is not simply a warning label but a safeguard that informs investors who jump late into surging stocks of the risks," Park said. "Even if regulations are eased, investor protections such as risk disclosure and monitoring of unusual trading must not be loosened as well."
