[Edaily Reporter SIN SOO-JUNG ] As the KOSPI plummeted 30% from its two-month high, large-scale leveraged investments by retail investors have emerged as a risk factor for the Korean stock market. While the government has relaxed regulations on investment products to address the “Korea discount,” observers point out that market volatility has increased due to the convergence of the artificial intelligence (AI) investment boom and leveraged retail investing.

According to Reuters on the 21st, the KOSPI has fallen by about 30% since hitting its peak on June 19. Losses have also mounted for retail investors who borrowed money to buy stocks or invested in leveraged exchange-traded funds (ETFs) during the market rally. In a client report released on the 28th of last month, Citigroup estimated retail investors’ losses from leveraged ETFs at $38.7 billion. At an exchange rate of 1,392.6 won per dollar, this amounts to approximately 53.9 trillion won.

The investment frenzy was fueled by the boom in AI semiconductors. As the stock prices of Samsung Electronics and SK Hynix soared, retail investors rushed into the stock market. According to data from the Korea Financial Investment Association cited by Reuters, the outstanding balance of margin loans hit a record high of 29.8 trillion won on June 24—an increase of about 75% from the beginning of the year.

The government’s deregulation also fueled the investment frenzy. With the aim of reducing regulatory disparities between domestic and foreign ETFs, financial authorities permitted single-stock leveraged and inverse products based on Samsung Electronics and SK Hynix. These products were first listed on May 27. Since leveraged products are structured to track the daily return of the underlying asset by a certain multiple, losses can grow rapidly if stock prices fluctuate sharply.

The problem was that the launch coincided with a period of stock market overheating. The KOSPI had already more than doubled from its low point in October of last year. Reuters analyzed that volatility increased further as leverage products tracking Samsung Electronics and SK Hynix—which together accounted for more than 53% of the KOSPI’s market capitalization—began trading.

In fact, investor sentiment froze rapidly in July. The VKOSPI, dubbed the “Korean fear index,” soared to 97.99 in early July, hitting its highest level since records began in 2009. There were also several days when the KOSPI fluctuated by 5–8% in a single day.

These massive losses are also affecting the sentiment of retail investors. Investment YouTuber Jeon Seok-jae, who has 3.7 million subscribers, told Reuters, “Many people who entered the market have suffered heavy losses, and a significant number may be so shaken that they lose interest in investing altogether.”

Dr. Park Jong-seok, a psychiatrist specializing in mental health who provides investment counseling in Seoul, reported that the number of patients seeking help for investment-related issues—which had been around 7 to 8 per day last year—has risen to an average of 11 per day since June of this year. In Busan, a man in his 20s was arrested on charges of brandishing a weapon after blaming a YouTuber for his stock market losses.

The policy burden has also grown. The Lee Jae-myung administration has been working to resolve the “Korea discount” and secure inclusion in the Morgan Stanley Capital International (MSCI) developed markets index through improvements in corporate governance and capital market reforms. However, there is growing concern that the recent extreme volatility could hinder efforts to attract long-term foreign investment.

Heo Jae-hwan, an analyst at Eugene Investment & Securities, told Reuters that volatility has become excessively high before the results of corporate governance improvements have taken hold in the market, adding that this could make it difficult for foreign investors to commit to long-term investments.

The government maintains that it thoroughly reviewed the risk factors when introducing single-stock leveraged products. The Office of the President told Reuters, “The government is committed to maintaining market stability.” The Financial Services Commission also explained that it comprehensively examined various risk factors at each stage.

Some retail investors have lost confidence in the domestic stock market. Park Dal-bo, a retiree in his 80s who has invested in stocks for 30 years, said he lost 35% of his investment during this sharp market decline and added, “I don’t think I’ll ever invest in the KOSPI again.”

The recent sharp fluctuations once again demonstrate that resolving the “Korea discount” depends not merely on rising stock prices, but on ensuring market stability and securing investor confidence.