Ants Who Threw Stocks Every December... Is This Year Different?

[Asia Economy Reporter Koh Hyung-kwang] Individual investors, who used to flood the market with sell orders every December to avoid the 'major shareholder threshold' subject to capital gains tax on stock transfers, are showing net buying behavior this year, unlike previous years. This is analyzed to be influenced by the government's decision to cancel the planned drastic tightening of the major shareholder threshold from 1 billion KRW to 300 million KRW starting next year, as well as the steady rise in the stock market boosting individual investors' sentiment.

According to the Korea Exchange on the 17th, individual investors have net purchased stocks worth a total of 3.0817 trillion KRW in the KOSPI market up to the previous day this month. During the same period, individuals also bought stocks worth over 1 trillion KRW (1.0158 trillion KRW) in the KOSDAQ market. This pattern differs from the past behavior of individuals who used to unload large volumes of stocks at the end of each year.

From 2012 to last year, individual investors have consistently net sold stocks in both the KOSPI and KOSDAQ markets in December. The average monthly net selling volume in December was 2.0338 trillion KRW in KOSPI and 418.5 billion KRW in KOSDAQ, totaling 2.4523 trillion KRW. Notably, in the KOSDAQ market, individuals recorded net buying cumulatively from January to November almost every year, but invariably showed net selling in December. In the case of KOSPI, net selling in December has been recorded for 12 consecutive years since 2008.

This year-end selling trend is interpreted as an effort to avoid the major shareholder criteria. According to the Enforcement Decree of the Income Tax Act, shareholders holding a certain amount or percentage of shares in a specific stock as of the end of the year are classified as major shareholders under tax law and have been required to pay taxes on part of the capital gains from transactions starting the following year.

Currently, in KOSPI, shareholders holding 1 billion KRW or more or a stake of 1% or more (2% or more in KOSDAQ) are classified as major shareholders. The holdings of not only the individual shareholder but also their spouse, direct ascendants and descendants, and affiliated companies under management control are aggregated for this determination.

In fact, when the major shareholder threshold was expected to be lowered in December 2017 (from 2.5 billion KRW to 1.5 billion KRW) and December 2019 (from 1.5 billion KRW to 1 billion KRW), individual investors net sold 5.1314 trillion KRW and 4.823 trillion KRW respectively, which was much larger than the average December net selling volume of 1.1433 trillion KRW.

Originally, the major shareholder threshold was scheduled to be lowered from 1 billion KRW to 300 million KRW starting next year, so a large-scale sell-off was expected at the end of this year as well. However, due to strong resistance from the so-called 'Donghak Ants', the threshold was maintained at 1 billion KRW, and the feared 'sell-off bomb' phenomenon has not appeared. A securities industry official said, "If the major shareholder threshold had been tightened from 1 billion KRW to 300 million KRW, the net selling volume by individuals would have reached several trillion KRW. Fortunately, with the threshold maintained as is, concerns about large-scale net selling by individuals at year-end have diminished."

The unprecedented bullish trend in the stock market, with both KOSPI and KOSDAQ hitting record highs, is also analyzed to have contributed to reducing individual investors' sell orders at year-end. Seo Sang-young, a researcher at Kiwoom Securities, said, "The domestic stock market, which has been breaking record highs in the second half of the year, seems to have partially influenced the annual recurring phenomenon of individual investors' net selling at year-end. The stock prices of large-cap stocks with high individual net buying ratios, such as Samsung Electronics and LG Chem, have risen, strengthening individual investors' buying momentum."

However, with about half a month left until the end of the year and the possibility of a sudden surge in profit-taking sell orders, some analysts caution that it is premature to conclude that individual buying momentum will continue. Kim Min-ki, a researcher at the Capital Market Institute, said, "Due to the continuous preference for risky assets by individual investors, the flow of investment funds in the stock market at the end of this year may develop differently from the past. However, given the steady performance of the domestic stock market this year, there is also a possibility that individual investors' net selling for profit-taking at year-end may strengthen compared to previous years. Furthermore, short-term buying by institutional investors is likely to concentrate as year-end approaches, which could lead to stronger net selling by individual investors at year-end than at other times."

This content was produced with the assistance of AI translation services.