[Beginner's Guide to Stock Market] 'Cell Korea' Lost 8 Trillion Won This Year... Why Foreign Investor Supply Is Important

[Asia Economy Reporter Kwon Jaehee] Last week, the departure of foreigners from the Korean stock market became a hot topic. As of the 14th of this month, a staggering 8.06 trillion KRW has flowed out of the Korean stock market since the beginning of the year. The KOSPI index plummeted due to foreigners' 'sell Korea' actions. Foreign investors, who are key players controlling our market, are indeed influential. So, who exactly are these foreigners, and why is their trading activity so important?

[Image source=Reuters Yonhap News]

Who Exactly Are Foreigners?

When we talk about foreigners in the Korean stock market, many might imagine white investors working on Wall Street in New York, managing large-scale funds, as seen in movies. Of course, there are such investors among the foreigners in our market. However, they are not the entirety. Investors from various nationalities including Western countries like the United States and the United Kingdom, as well as China, Japan, and Africa, are present in our market. This is because the Korean stock market is 100% open.

Among foreign investors, there are individual investors as well as institutional investors. Representative foreign institutional investors include Merrill Lynch, JP Morgan, and Goldman Sachs.

Additionally, there are foreign individual investors who are classified as other foreigners.

According to current law, foreign investors must obtain a foreigner registration certificate from the Financial Supervisory Service to trade domestic stocks. However, if they reside in Korea for more than six months, they can invest in domestic stocks without the certificate. Their trading activities are all recorded as other foreigners.

[Image source=AP Yonhap News]

Why Is Foreign Investors' Trading Activity Important?

So, why is there such interest in the trading activity of foreign investors among market participants? It is because many foreign investors are institutional investors managing large-scale funds, thus exerting significant influence on our stock market.

In particular, foreigners tend to invest mainly in large-cap stocks linked to indices rather than small-cap stocks. Samsung Electronics and Hyundai Motor are representative examples. Since these stocks hold a large proportion of our stock market, the buying and selling activities of foreigners directly affect the ups and downs of the KOSPI.

In other words, foreigners have a large scale of funds under management and mainly trade large-cap stocks that hold significant weight in our stock market, which is why their influence on our stock market is substantial.

[Image source=AP Yonhap News]

'Geommeowoe' Disrupting the Korean Stock Market... What About Black-Haired Foreigners?

When reading securities-related articles, you often come across the term black-haired foreigners.

Black-haired foreigners literally refer to Koreans who live in Korea but have acquired foreign nationality or permanent residency.

But why are these black-haired foreigners problematic in the stock market? As we have seen, the trading activity of foreigners has a significant impact on the Korean stock market. Some individual investors follow their investments. The problem lies with these black-haired foreigners who invest in the Korean stock market pretending to be foreign capital. They understand the importance of foreign investors' trading activity and exploit it as an investment strategy. When foreign investors' trading activity comes in, individual investors generally expect the market to rise and buy the stocks that foreigners have purchased. Black-haired foreigners exploit this by deliberately driving up stock prices.

For example, they establish paper companies or special purpose entities overseas, transfer funds abroad, and then invest in Korean stocks through overseas branches of domestic securities firms or foreign securities firms. This makes it appear as if the investment is from foreigners.

Then, they select some small- and mid-cap stocks and concentrate their purchases. From the perspective of individual investors, seeing foreigners buying lesser-known small- and mid-cap stocks leads them to mistakenly believe there is undisclosed good news, prompting them to chase the stocks. As the stock price rises, black-haired foreigners sell their holdings to individual investors and exit.

Because of this, black-haired foreigners are sometimes perceived as entities that disrupt the Korean stock market.

Editor's Note[Beginner's Guide to Stock Investing] is a smart investment guide for 'Joorini' (stock + children). We will kindly and easily explain unfamiliar stock stories to beginners.

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