After the Korean Stock Market Crash, Retail Investors "Lose Confidence": Remember Two Principles—"First: Do Not Buy Korean Stocks; Second: Follow the First Rule"

South Korean retail investors were once known for their risk-taking appetite, but the historic plunge in the KOSPI index in July has thoroughly shaken this group's confidence. From the streets of Seoul to social media, anger and regret have spread, with some investors vowing never to touch Korean stocks again. This market crash is profoundly reshaping the investment psychology of South Korean retail investors.

In July, the KOSPI index plummeted 22% in a single month, marking its largest monthly decline since the global financial crisis. The circuit breaker was triggered four times within the month, setting a historical record. Despite a strong 18% rebound at the end of the month, retail investors recorded net selling of KOSPI stocks on the day of the rebound, indicating that confidence restoration is far from imminent.

According to a Bloomberg report on August 4, Seoul resident Kim Han-kyung stated that she has engraved two principles in her mind:

"First: Do not invest in the Korean stock market; Second: Follow the first rule."

The trigger for this crash is partly attributed to the single-stock leveraged ETF products launched under government guidance. Retail investors cumulatively purchased approximately 78 trillion won (about $54.2 billion) worth of KOSPI stocks between May and June, only to suffer severe losses during the intense volatility in July. Market analysts warn that the deleveraging process is difficult to conclude in the short term, and the intense volatility in technology and semiconductor stocks may continue for several months.

Feverish Entry, Trapped in Losses

Since May this year, optimism has pervaded the South Korean stock market. President Lee Jae-myung vigorously promoted stock market reforms, coupled with the official listing of single-stock leveraged ETFs in late May, providing retail investors with tools to seek amplified returns. FOMO (Fear Of Missing Out) quickly spread.

Against this backdrop, a large number of retail investors flooded into the market, concentrating their bets on AI concept leaders such as Samsung Electronics and SK Hynix. These two top global memory chip manufacturers account for over 50% of the KOSPI index weight and are core beneficiaries of the global AI boom in the Korean market.

However, the sharp reversal in July caught these new entrants off guard. According to reports, Kim Han-kyung bought Korean stocks for the first time in early May. She recalled:

"It was an era of KOSPI fever, and I was completely swept up in the hype. Now I am truly afraid."

Lee Jung-min, 40, mortgaged his apartment to borrow 50 million won to enter the market and is also deeply entrenched in losses. "The government poured oil on the fire with those leveraged ETFs," he said. "They turned the stock market into a casino, which I believe is wrong."

Judging from market data, the intensity of this crash is not to be underestimated.

Samsung Electronics fell 21% in July alone, while SK Hynix dropped by as much as 35%. Nevertheless, Samsung's stock price has cumulatively risen more than fourfold since the beginning of 2025, and SK Hynix's gain approaches tenfold. After this round of correction, the KOSPI index still ranks among the top performers globally year-to-date.

Kim Dong Woo, a 33-year-old investor with over seven years of trading experience, stated:

"Such drastic levels of volatility indicate that the market is still not functioning normally."

Leveraged ETFs Become the Scapegoat

Single-stock leveraged ETFs were originally introduced by Korean regulators to broaden investment channels for retail investors and curb capital outflows to similar overseas products. However, they became the scapegoat in this crash, widely accused of amplifying market volatility.

According to reports, Lale Akoner, Global Market Analyst at eToro Group in London, characterized the event as a "textbook case of crowded trades meeting leverage."

She pointed out that the deleveraging process is unlikely to resolve within days, and investors should expect continued intense volatility in technology and semiconductor stocks in the coming months. However, she emphasized that "this should not be misinterpreted as a complete collapse of the AI investment thesis."

In response to market turmoil, South Korean authorities have taken action: suspending the listing of new single-stock leveraged ETFs in mid-July and promising last week to introduce more measures to stabilize the stock market and restrict retail access to such products. However, many retail investors and market participants believe these measures came too late.

Francis Tan, Chief Asia Strategist at Suez Wealth Management in Singapore, stated that the current environment poses a "significant challenge" to the South Korean government.

On social media, retail investor dissatisfaction is ubiquitous, with most criticism directed at the government. Jung Eui-jung, head of the Korea Shareholders Alliance, which has 64,000 members, bluntly stated:

"Retail investors are furious with the government; the level of anger and criticism has reached its peak."

Analysts point out that although the fundamental AI boom driving the rise of the Korean stock market remains unchanged, the painful experience of July has profoundly revealed to many retail investors that: the power that can bring excess returns can also quickly devour them. The market may recover its losses within a few months, but rebuilding retail investor confidence will likely take much longer.