This blog post starts with what red and blue signify in the stock market, then explores how to read market trends through buying and selling psychology, the KOSPI and KOSDAQ indices, and the movements of major investors.
The stock market, turning blue with fear then red with excitement, constantly fluctuating
In the market, prices fluctuate based on supply and demand. The stock market is no exception to this principle. However, a key characteristic of the stock market is that supply is largely limited. While changes in supply can occur, such as when a company newly lists or is delisted, it is generally accurate to view it as a market driven primarily by demand.
Therefore, for the price of a stock to rise, the number of people wanting to buy that stock must increase. In practice, this is expressed as “buying increases.” In the stock market, rising stock prices are conventionally marked in red. If a stock market ticker shows a lot of red, it can be interpreted as meaning the stock market is booming. In other words, it means many people are forecasting that the economy will improve. Conversely, if people expect the economy to worsen, they start selling stocks. The act of selling stocks is called “selling.” When selling increases, demand decreases, and stock prices fall. A decline in stock prices is shown in blue. Now, just by looking at the colors on the stock market chart, you can roughly gauge the market conditions.
An increase in buying means people are anticipating that “this company’s profits will improve.” This prediction might be based on various objective data, or it could stem from personal intuition or expectations. Either way, because they anticipate the stock price will rise in the future, the current price is perceived as relatively cheap. Believing that buying this stock now won’t result in a loss increases demand, and consequently, the stock price rises.
Stock prices don’t just keep rising or falling indefinitely. As time passes, if people’s expectations prove accurate, the rising stock price will eventually stabilize at a reasonable level. Conversely, if expectations are off, the stock price may fall further than anticipated, or it may decline and then rebound. This pattern is often described as a “correction” in news or articles.
Meanwhile, a falling stock price does not necessarily mean selling exceeded buying. While not the norm, exceptions exist everywhere. For instance, if a stock is priced at $10 and 10 investors buy it at $11, the price rises to $11. However, if just one person sells that stock at $9 right before the market closes, the stock’s closing price for that day ends at $9. Because such situations are possible, one should not automatically conclude that blue on a stock market chart indicates heavy selling, nor should one judge the market based solely on a single day’s price movement. Assessing the stock market requires not just a single day’s indicator, but a calm attitude of observing trends over time. Now, let’s look at a few more basic terms and concepts you should know to read market conditions.
Clouds that help gauge the weather: KOSPI
KOSPI stands for “Korea Composite Stock Price Index” and is South Korea’s representative composite stock price index. It was established with a base value of 100 based on the market capitalization as of January 4, 1980, and is calculated by converting the market capitalization at the comparison point.
KOSPI is calculated as follows:
KOSPI = (Market Capitalization at Comparison Point ÷ Market Capitalization at Base Point) × 100
Observing the KOSPI provides a rough gauge of the overall economic situation. Simply put, a rising KOSPI indicates a favorable stock market, while a falling KOSPI suggests a sluggish market. The calculation basis for the KOSPI is market capitalization.
Market capitalization can increase either because the number of shares has grown or because stock prices have risen. In either case, an increase in market capitalization signifies that the overall value of the stock market has risen.
A rise in the stock market’s value can also be interpreted as an increase in corporate value. Corporate value typically rises when a company’s current earnings improve or when future earnings are anticipated. Therefore, when the KOSPI rises, it is often interpreted as an indication of an active economy. Conversely, a decline in the KOSPI can be seen as a sign of an economic slowdown.
However, a rise in the KOSPI should not be unconditionally accepted as proof of economic activity. This is because the KOSPI can fluctuate significantly based on changes in the stock prices of specific large-cap stocks, regardless of the overall market trend. For example, if the stock price of a company with a very large market capitalization weight, like Samsung Electronics, falls, the KOSPI index can drop even if other stocks are rising. Therefore, when forecasting the economic situation based on the KOSPI’s trend, one should not jump to conclusions by looking only at the index’s ups and downs. Instead, it is essential to examine what variables are at play both within and outside the market.
The KOSPI is like clouds in the weather. When the sky is heavily overcast, it’s natural to wonder, “Is it going to rain?” But even if the sky over Seoul is completely clouded, the sky over Busan could be clear. This means the numbers right in front of you cannot be the absolute standard. At this stage, it’s sufficient to understand that the KOSPI serves as one reference indicator for gauging the economic situation—essentially, it plays a role similar to clouds that help predict the weather.
Let’s also remember the KOSPI’s approximate levels. In recent years, the KOSPI index has shown significant fluctuations depending on the economic situation and global financial environment. The 2,000 and 3,000 levels are still frequently mentioned as symbolic benchmarks for gauging market sentiment. When the stock market is performing very poorly, you’ll encounter the phrase “KOSPI falls below 2,000,” and when the market is booming, news of “KOSPI breaking through 3,000” often appears.
KOSDAQ: The Minor League of Professional Baseball
KOSDAQ (Korea Securities Dealers Automated Quotation) is the name of South Korea’s primary over-the-counter stock market. Modeled after the U.S. NASDAQ, it serves as a platform for companies not yet listed on KOSPI. Small and medium-sized enterprises (SMEs) and venture companies are primarily active in this market.
The relationship between KOSPI and KOSDAQ is easiest to understand by comparing it to the major league and minor league in professional baseball. KOSDAQ is a market where companies gather that haven’t yet gained enough market recognition to be included in KOSPI, but possess the growth potential to move up to the major league at any time. In other words, it’s a stage where future star players test their potential. Of course, there are also many so-called ‘empty shell’ companies that appear like gems but ultimately fail to meet expectations. Consequently, KOSDAQ hosts many less well-known companies compared to KOSPI, and the volatility of profits and losses is also greater. As KOSDAQ is a secondary market, even when its index fluctuates significantly, its overall impact on the economy is relatively smaller compared to KOSPI.
Adventurers exploring the dungeon: Foreigners, Institutions, Retail Investors
Finally, let’s examine the participants in the stock market. As the stock market is a market itself, it also has so-called ‘big players’. These entities, managing large sums of capital, buy and sell very large volumes at once.
The physical market, where actual goods or stocks are traded, is often divided into wholesale and retail. By this standard, big players correspond to wholesalers. Conversely, ordinary individual investors are closer to retailers who trade in small quantities.
In physical markets, wholesale traders often receive lower prices. Because they distribute large volumes, their units are larger and prices are relatively cheaper. However, the stock market is different. Being a wholesale trader does not mean they can buy stocks at cheaper prices. Instead, they possess the power to move the market price itself.
Major players in the stock market are broadly divided into foreign investors and institutional investors. Foreign investors, often called ‘foreigners,’ include hedge funds and foreign financial institutions. A representative institutional investor is the National Pension Service. Domestic financial institutions like banks, securities firms, and private equity funds, which are not individuals, are collectively referred to as institutional investors. On the other hand, individual investors like you and me, though numerous, are relatively disadvantaged in terms of capital and are often called ‘ants’. The expression “foreigners with black hair,” often appearing in news reports, refers to individuals who are Korean nationals but hold the legal and institutional status of foreign investors.
An article titled “KOSPI rebounds over 1% on foreign and institutional buying…hits 2,399 level” (Financial News, December 14, 2022) is now relatively easy to understand. It means demand increased as foreign and institutional investors bought, causing the KOSPI to rise. Conversely, when the KOSPI falls, headlines often use the somewhat clichéd expression “retail investors’ tears.”
The power disparity between foreign/institutional investors and retail investors is easy to grasp when compared to character levels in mobile games. Foreign and institutional investors are like clans with top-tier party members. Skilled swordsmen, mages, and healers team up to tackle powerful bosses—high-yielding stocks—in the dungeon, i.e., the stock market. They are experts equipped with weapons and armor enhanced through multiple upgrades. They subdue the boss and claim valuable items, i.e., profits. In contrast, retail investors are closer to ‘newbies’ who have just started the game, wielding only a dagger as they venture into the dungeon. Of course, extremely rare individual investors who reach near-max level also appear; they are commonly called ‘super ants’.
In 2020, a new term, “Donghak Ants,” emerged, likening the individual investors who actively participated in the domestic stock market to the Donghak Peasant Movement that rose against foreign forces in the late Joseon Dynasty. While individual investors had previously been at a relative disadvantage compared to foreign and institutional investors, in 2020 they bought more shares than foreign investors sold, supporting stock prices and even driving the market upward. This case remains a symbolic scene illustrating how crucial the balance of demand, supply, and the relative power of market participants is in the stock market.
