Last week, Korea’s KOSPI index dropped nearly 9% in a single session and shed more than a third from its June high. The pain was concentrated among investors who borrowed money to buy shares - a practice called margin trading. When a stock falls below a lender’s minimum, the borrower gets a “margin call” and is forced to sell.
The danger is the feedback loop. Forced sales push prices down further, triggering more margin calls, which trigger more selling - a cascade that has nothing to do with the underlying value of the companies. In a market filled with leveraged ETFs, this loop can be amplified many times over.
Korea’s KOSPI fell sharply and the damage was especially severe for retail investors who had added debt to chase earlier gains. Analysts warn that when a large share of institutional selling is tied to forced liquidation, normal supply-and-demand no longer sets the price - the structure of the trade does.
For ordinary investors, the lesson is about leverage. Borrowing to invest magnifies both gains and losses, and a market that has rallied on borrowed money can reverse just as fast. The safest hedge against a margin cascade is never to be forced into the trade in the first place.