Summary of Key Events
In the first half of 2026, the South Korean stock market experienced a leveraged bull run driven by the surge in demand for AI storage chips (with Samsung and SK Hynix reporting record profits). Investors from all walks of life borrowed money to trade stocks, with even investors from Hong Kong participating through leveraged ETFs. However, between June and July, the market saw multiple circuit breakers triggered, leading to a wave of forced liquidations for leveraged funds, resulting in massive losses for many investors (including a 26-year-old Hong Kong trader who lost HK$150 million by using HK$50 million from his company). This extreme market scenario, which transformed from a "myth of getting rich" into a collective disillusionment, was rooted in the proliferation of leverage, structural flaws in the index, and retail investors' misconceptions about cyclical stocks, ultimately delivering a costly lesson on risk management.
I. South Korean Stock Market Surge in the First Half of the Year: AI Chips Drive Growth
The demand for AI computing power surged, leading to a shortage of high-end storage chips (HBM), which caused prices to skyrocket. The global storage market was dominated by two firms, Samsung and SK Hynix, whose profits doubled, driving their stock prices up by 100% and 200%, respectively, and making the KOSPI index one of the strongest in the world.
South Koreans have a long history of trading stocks, and this time they went absolutely crazy: college students used their living expenses, working professionals took out credit loans, and even housewives invested all their savings. An internet worker in Seoul invested HK$20 million in SK Hynix and made a profit of over HK$50 million by June, nearly enough to cover the down payment for an apartment in Gangnam District; a worker from Hong Kong who bought a few shares saw his account value double instantly. Everyone saw this as a once-in-a-lifetime opportunity to become rich and eagerly leveraged their investments (by borrowing money to trade stocks).
Hong Kong investors were not left out either. ETFs that allowed them to bet on SK Hynix or Samsung at twice the normal exposure became highly sought after, as directly buying South Korean stocks was more complicated. Mainland Chinese investors were relatively more cautious, mostly participating through public funds and thus avoiding some of the more risky trades.
II. The Sudden Crash: Multiple Circuit Breakers and Mass Liquidations
On June 8, the market experienced its first circuit breaker, which was initially seen as a normal adjustment, prompting further increases in positions. However, on June 23, Samsung and SK Hynix' stocks plummeted by 12%, dragging the entire market down. Another circuit breaker occurred on June 26, and panic began to spread. The situation worsened on July 13 when the crash in U.S. chip stocks triggered another circuit breaker, followed by two more on July 28 and 29, marking the "darkest moment" of the market.
Leverage turned out to be a fatal factor: during rises, borrowing money to buy stocks amplified profits; during declines, brokers forced liquidations, selling stocks and requiring investors to repay the loans, creating a vicious cycle of further losses. Many retail investors in South Korea lost all their capital and even owed the brokers money, with some needing psychological support. The Hong Kong trader mentioned earlier suffered an even more extreme outcome—using HK$5 million from his company and adding another layer of leverage through the ETFs, resulting in a loss of HK$150 million and leading to his arrest.
III. Why Were South Korean Stock Market Volatilities So Extreme?
There were three hidden factors contributing to these extreme fluctuations:
1. Proliferation of Leverage: The South Korean government promoted many leveraged funds, which were heavily concentrated in Samsung and SK Hynix stocks. When prices rose, investors borrowed more; when they fell, forced liquidations occurred on a large scale, leading to an unstoppable downward trend.
2. Index Structural Flaws: Samsung and SK Hynix accounted for half of the KOSPI index weight, meaning the entire market was heavily dependent on these two companies' performance. In a normal market, sectors like consumer goods and finance could offset declines in technology stocks, but South Korean markets lacked such buffers. A decline in storage chip prices caused the entire market to collapse.
3. Retail Investors' Misconceptions: Storage chips are considered cyclical stocks (whose performance fluctuates with industry supply and demand), but many retail investors viewed them as growth stocks (expected to continue rising). The reality is that cyclical stocks usually have their highest profits and lowest P/E ratios at the peak of the cycle, indicating it's time to sell; however, investors bought more, taking on additional risk. Professional institutions had already sold their positions at the peak, leaving retail investors as the bearish market participants.
IV. Lessons for Ordinary Investors
As the tide recedes, here are some key takeaways:
1. Avoid Leverage: Borrowing money to trade stocks is like a double-edged sword—potential huge gains can quickly turn into devastating losses. The Hong Kong trader's experience illustrates this: a HK$5 million investment resulted in a loss of HK$150 million, along with legal consequences.
2. Respect the Cyclical Nature of Markets: Stocks in cyclical sectors (such as chips and steel) do not always rise; when supply and demand change, prices fall. The sharp increase in storage chip prices could suppress demand for smartphones and computers, leading to price declines once production capacity increases—this is a fundamental market principle.
3. Be Cautious of Consensus: When everyone agrees that prices will only rise, it may be a sign of an impending reversal. For example, in the first half of 2026, many believed a "golden age" for the stock market had begun, only for it to crash soon after. Conversely, panic in the market can present buying opportunities (but always consider fundamental factors).
4. Stay Within Your Area of Expertise: Avoid investing in areas you don't understand. Mainland Chinese investors avoided significant losses because of limited access to South Korean markets; a cautious investor who was wary about the sustainability of rising storage chip prices did not take heavy positions and thus suffered no losses.
In Conclusion
High returns are always accompanied by high risks. The frenzy fueled by leverage can be extremely rewarding, but the subsequent collapse can be equally devastating. Avoiding leverage, respecting market cycles, and not following herd behavior are essential for ordinary investors to navigate market volatility and protect their investments.