Chinese media outlet Wallstreetcn.com recently introduced the topic that stock prices in South Korea surged this year (2026) and then crashed in mid-July. As many people had engaged in high-risk, high-return investments with leverage, they reportedly suffered a devastating 'life is over' type of blow from which they cannot recover.

A month ago, South Korean social media was overflowing with success stories about stock investments. One woman posted that she had invested her entire salary in stocks and earned profits equivalent to five years of salary. She said she saw not only herself but also people rejoicing on the streets of Seoul. However, she wrote that what seemed like 'humanity's golden age' was an 'illusion.' A month later, the Korea Composite Stock Price Index (KOSPI) recorded a 40% crash, falling from its peak of 9,385 points to 5,663 points. According to estimates by Citigroup analysts, this crash resulted in South Korean individual investors losing approximately 56.3 trillion won (about 6.2 trillion yen) in leveraged exchange-traded funds (leveraged ETFs).

Due to the sharp market decline, over 1.2 million leveraged accounts fell below the margin maintenance ratio, reaching the margin call line. Of these, 360,000 accounts were forcibly liquidated by securities companies, and investors' principal instantly became zero. This meant that one in 30 adult South Koreans was subjected to forced liquidation. It is speculated that the woman who rejoiced at having earned five years' worth of salary likely met this tragic end as well. The nationwide speculative boom in South Korea, which unfolded on a historic scale, ended in tragic results in just one month.

The incident originated from the rapid surge in stock prices in the first half of 2026. KOSPI soared by 116%, from 4,300 points to 9,385 points, making its growth rate the highest in the world. Behind this was an explosion in demand for semiconductors for AI. There are only three companies in the world capable of mass-producing High Bandwidth Memory (HBM), which is essential for computing power, and two of them are South Korea's SK Hynix and Samsung Electronics. The market capitalization of these two companies accounted for approximately 60% of KOSPI, meaning that buying these two stocks was an investment in AI itself. Funds from around the world flowed in, leading to an unusual situation where trading in these two stocks and related leveraged ETFs exceeded 70% of the total trading value of the entire market.

In response to this unusual surge, the South Korean government, far from cooling down the overheated market, adopted policies that instead fueled it. With the aim of repatriating approximately 70 trillion won (about 8 trillion yen) that domestic individual investors had outflows abroad, the government approved 2x leveraged ETFs linked to Samsung and SK Hynix. In just two months, more than 10 leveraged products were listed, and their assets under management swelled from 5 trillion won (about 550 billion yen) to 76 trillion won (about 8.4 trillion yen). Individual investors net bought South Korean stocks worth 99.2 trillion won (about 11 trillion yen) in the first half of this year (2026) alone, with most of it leveraged. The rise in stock prices attracted capital inflows, and leveraged funds further pushed up stock prices, creating a chain reaction.

However, behind the substantial rise in KOSPI, foreign investors recorded a record net selling of 148.3 trillion won (about 16.31 trillion yen) in the first half. The point at which foreign capital sold off was precisely the market's peak. What proved fatal for investors was the unique mechanism of leveraged ETFs. To maintain daily 2x leverage, investors are forced to make mechanical position adjustments (adjustments to their holdings) before the closing price. When stock prices fall, they are compelled to reduce their positions, which in turn triggers further selling. This mechanism, which amplifies profits in a rising market, transformed into a cruel device that erodes investors' assets in a falling market.

The collapse came suddenly. On July 16, KOSPI was recognized to have entered a technical bear market, falling more than 20% from its peak. Moreover, on the same day, South Korea's central bank raised its policy interest rate to 2.75%. On July 28, KOSPI fell by more than 10%, dropping below 6,000 points, and the stock prices of Samsung and SK Hynix also crashed by over 13% to 14%, triggering circuit breakers (a system that temporarily halts all trading when stock prices rise or fall beyond a predetermined percentage). The next day, July 29, it fell by nearly 6%, resulting in a second consecutive trading halt, and the market plunged into panic. Analysts at CLSA Securities in France declared that 'the market has lost its price discovery function.' Only mechanical forced liquidations were executed, irrespective of fundamentals.

Individual investors continued to buy more even during the stock price decline, further expanding their losses. Investors who net bought SK Hynix held an average unrealized loss of 31.6%. In anonymous SNS communities with employer verification, desperate voices of bankers who lost most of their funds shortly after multiplying them several times, and young people who lost 40% of their wedding funds, overflowed. A 45-year-old company employee bought more each time the market fell, and their unrealized losses exceeded half, while a 25-year-old university student who had invested their part-time job earnings even borrowed a living expense loan for additional investment, halving their funds. A 60-year-old resident also lost most of the profits they had made this year.

There are even more tragic examples. A 40-year-old man whose wife was about to give birth invested in a 5x leveraged product and lost funds equivalent to approximately 6 million yen in one day due to forced liquidation. Unlike a mere book loss, the funds completely disappeared due to forced liquidation. According to the Financial Supervisory Service, 62% of the forcibly liquidated accounts belonged to young people in their 20s and 30s. For them, who burned through their assets during the brightest period of their lives in the stock market, even if the market finds a new equilibrium and reaches new highs in the future, it will mean nothing. Their investment game is already over. (Translation/Editing: Kisaragi Hayato)