In this blog post, we’ll explore the basic concepts for reading stock market trends—from the principles behind rising and falling stock prices to the meanings of the KOSPI and KOSDAQ indices, and the roles of foreign investors, institutional investors, and retail investors.
A Stock Market That Swings from Pale Blue to Bright Red
In the market, prices are determined by supply and demand. However, supply in the stock market is largely limited. While changes in supply do occur—such as when new companies go public or existing ones are delisted—it’s generally safe to say that the market is driven by demand.
Therefore, for a stock’s price to rise, the number of people looking to buy that stock must increase. In practice, this is described as “buying volume increasing.” A rise in stock prices is indicated by the color red. If there is a lot of red on the stock market ticker, it can be interpreted as a sign that the stock market is booming. This means that many people expect the economy to improve in the future.
Conversely, if the economy is expected to worsen, people begin to sell their stocks. The act of selling stocks is called “selling,” and when selling increases, stock prices tend to fall. A decline in stock prices is indicated in blue. Now, just by looking at the colors on the stock market chart, you can get a general sense of the market sentiment.
An increase in buying means that people expect “this company’s earnings will improve.” Such predictions may be based on objective data or on personal judgment. In any case, because they expect stock prices to rise in the future, they believe the current price is undervalued. Because they believe they won’t lose money even if they buy now, demand increases, and as a result, the stock price rises.
Stock prices do not simply keep rising or falling indefinitely. As time passes and people’s expectations are confirmed, a rising stock price stabilizes at a reasonable level. Conversely, if expectations are off the mark, the stock price may fall short of expectations or drop before rebounding. This process is commonly referred to as a “correction” in news and economic articles.
However, just because a stock price falls does not necessarily mean that selling exceeded buying. While not common, exceptions do exist. For example, suppose a stock is priced at 100 won, and several investors buy it at 110 won, causing the price to rise to 110 won. If, just before the market closes, one investor sells at 90 won, the closing price for that day will be recorded as 90 won.
As such, you cannot automatically assume that there were more sell orders just because the stock market table is marked in blue. When assessing the market, you should not rely solely on a single day’s data. To gauge economic trends, you must carefully examine the trends over a specific period. Let’s now take a closer look at the basic terms and concepts you need to know to interpret market conditions.
The KOSPI: A Cloud That Helps Predict the Weather
KOSPI stands for “Korea Composite Stock Price Index” and is South Korea’s leading composite stock index. It is calculated by comparing the market capitalization at a specific point in time to a base value of 100, which was set based on the market capitalization as of January 4, 1980.
KOSPI = (Market Capitalization at the Comparison Point ÷ Market Capitalization at the Base Point) × 100
By looking at the KOSPI, you can gain some insight into the overall direction of the economy. Simply put, when the KOSPI rises, the stock market is doing well, and when it falls, market conditions are poor.
The KOSPI is calculated based on 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 means the overall value of the market has grown.
A rise in market value leads to an increase in corporate value. And corporate value often rises because expectations for current or future earnings have grown. Therefore, a rise in the KOSPI is generally interpreted as a sign of economic expansion. Conversely, a decline in the KOSPI can be seen as a signal of an economic slowdown.
Of course, a rise in the KOSPI should not automatically be interpreted as an economic upturn. This is because the movements of certain large-cap stocks can have a significant impact on the index. For example, if the stock price of a company with a large market capitalization—such as Samsung Electronics—falls, the KOSPI may decline even if other stocks are rising.
Therefore, when forecasting the economic situation based on the KOSPI, one must consider variables both within and outside the market, rather than focusing solely on the index itself.
If we compare the KOSPI to the weather, it is like clouds. When the sky is cloudy, we might think it’s going to rain, but even if Seoul is completely overcast, Busan could still be sunny. In other words, the numbers we see right now are not an absolute standard.
For now, it’s enough for you to simply understand that the KOSPI is one indicator that helps gauge the economic situation. For reference, as of December 2022, the KOSPI had shown significant volatility over the past 52 weeks, fluctuating between the 2,100 and 3,000 levels. When market conditions deteriorate, news headlines read “KOSPI falls below 2,000,” and when the market is booming, headlines announce “KOSPI breaks through 3,000.”
Like the minor leagues in professional baseball: KOSDAQ
KOSDAQ stands for “Korea Securities Dealers Automated Quotations.” Modeled after the U.S. NASDAQ, it is a market where small and medium-sized enterprises (SMEs) and venture companies are primarily listed.
The relationship between the KOSPI and KOSDAQ is easy to understand if you compare them to the major and minor leagues in professional baseball. KOSDAQ is home to many companies that, while not yet large enough to be listed on KOSPI, have significant growth potential.
Of course, the risks are just as great as the growth potential. It’s not uncommon for companies that initially looked like gems to fall short of expectations. As a result, these companies often have lower brand recognition than those on KOSPI, and the swings in profits and losses are relatively larger.
Although the KOSDAQ market has less influence on the overall economy than KOSPI, it often serves as a barometer for future industry trends.
Adventurers Exploring the Dungeon: Foreign Investors, Institutional Investors, and Retail Investors
Finally, let’s take a look at the major investor groups participating in the stock market.
The stock market also has what are known as “big players.” These are investors who manage massive amounts of capital and trade large volumes of shares at once.
The representative big players in the stock market are foreign investors and institutional investors. Foreign investors include overseas financial institutions and hedge funds. Institutional investors include the National Pension Service, banks, securities firms, insurance companies, and asset management firms.
On the other hand, while retail investors are numerous, their capital is relatively small, so they are commonly referred to as “ants.”
Occasionally, the term “black-haired foreigners” appears in the news; this refers to Koreans who invest through foreign corporations or overseas funds.
KOSPI Rebounds Over 1% on Foreign and Institutional Buying… Hits 2,399 Level (Financial News, Dec. 14, 2022)
Now you can easily understand this article’s headline. It means that demand increased as foreign and institutional investors actively bought stocks, resulting in a rise in the KOSPI.
To use a gaming analogy, foreign and institutional investors are like powerful guilds equipped with top-tier gear. Skilled warriors, mages, and support characters team up to take on the boss (stocks expected to yield high returns) in the dungeon (the stock market).
On the other hand, retail investors are more like novice adventurers who have just started playing the game. They’re at the level of exploring dungeons armed with nothing but a dagger. Of course, there are also highly skilled individuals among retail investors. They are commonly referred to as “super retail investors.”
In 2020, a new term, “Donghak retail investors,” emerged to refer to domestic retail investors. This term draws a parallel to the Donghak Peasant Revolution during the late Joseon Dynasty. At that time, even as foreign investors engaged in massive sell-offs, retail investors actively bought stocks, defending against falling prices and even driving up prices for some stocks.
