Neo-File : KOSDAQ, Bullish Stock Market
Recently our stock market has been very bullish. KOSPI. Korea Stock Price Index, rose almost 20% during last April, for just one month period. Investors of all ranks flock to the stock market in the hope of becoming a millionaire. As a consequence, it is not uncommon these days to meet people hilariously talking about their investment experiences in stocks. Ordinary investors in the secondary market are usually interested in the stocks traded in the organized exchange market. But many stocks not listed in the Korea Stock Exchange are also worth of investing. We call the market of this sort "the over-the-counter (OTC) market". The OTC market is not a formal organization with membership requirements or a specific list of stocks deemed eligible for trading. To have their shares traded on the OTC market, the unlisted companies have to register with KSDA (Korean Securities Dealers Association). Then, their stocks are traded on the KOSDAQ (Korean Securities Dealers Automated Quotation) stock market through its advanced automated trading system.
As a matter of fact, stock market's role is to provide direct financing for firms and investment return for investors. Stringent listing requirements on the KSE (Korea Stock Exchange), however, undermine this objective. For firms most needy of capital, specifically small and medium-sized enterprises and venture businesses, it is not easy to obtain efficient access to the exchange market.
KOSDAQ market has opened on July 1, 1996 to meet both the needs of investors who want high risk-return opportunities and emerging enterprises that have to finance capital for growth. Its function can be stated as follows: (1) to facilitate corporate financing for promising small and medium-sized firms and venture businesses, (2) to provide new exciting investment opportunities for investors, and (3) to help venture capital firms redeem investment capital and set up new investment funds.
KOSDAQ is the Korean version of America's NASDAQ (National Association of Securities Dealers Automated Quotation) System, which is a part of the OTC market. The U.S. OTC market is the largest segment of the U.S. secondary market in terms of the number of issues traded as well as the diversity of quality. While about 2,600 issues are traded on the New York Stock Exchange, almost 6,000 issues are actively traded on the NASDAQ market.
As of last March, KOSDAQ market consists of 328 registered companies, of which 261 firms are of small and medium-sized enterprises. Among them, there are 113 venture firms and 8 mutual fund companies. Although it amounts to almost the half of Korea Stock Exchange in terms of the number of listed companies, KOSDAQ's total equity market value is as little as 8.5 trillion won, just 5% of KSE. The most serious problem of KOSDAQ market is the lack of liquidity. Currently, the average daily trading volume is less than 1% of that of KSE.
However, KOSDAQ market has been on a strong rally since the start of this year on the back of small investors' active buying of venture business shares. Stock prices of some venture firms, including telecommunications and Internet-related corporations, are on an upward spiral. While KOSDAQ Index has risen by 75% since the beginning of this year, Venture Index - an auxiliary KOSDAQ market index - has been up as much as 120%. For example, shareholders of Goldbank Communications, an Internet-related venture firm, have enjoyed incredibly thirtyfold increase in stock price during the five month period, from 960 won early this year to 30,700 won in May. This kind of hot market results from the worldwide phenomenon of crazing for Internet-related shares. The U.S. stock market these days is represented by the strength of Internet-related shares such as Yahoo, Amazon, and so on. For instance, Amazon, the Internet bookstore, has earned as high as 800% increase in stock price during the past one year. High stock price is mainly due to the fast growth in annual sales of USD 610 million in 1998, compared to USD 148 million in 1997. But market opinions are divided as for the appropriateness of prices of these venture shares. Some people believe they are over valued, others do not.
We have to realize that not all venture businesses are 'Midas touch'. Each year as many as 400 ~ 800 venture firms are newly listed on NASDAQ, but almost the same number of companies are delisted following business failure. It applies to KOSDAQ market as well. Those who consider investing to KOSDAQ stocks should acknowledge that high expected returns are given in reward for high risks taken.
Professor of Business Administration Dept.
