South Korea Warns of Retail Investor Frenzy as Preferred Stock Soars 1,270%

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(Bloomberg) -- South Korean regulators have warned local traders about a handful of tiny preferred stocks that have rallied at more than 10 times the gains in their corresponding common shares.

The 20 best-performing preferred stocks are thinly-traded issues with market caps of about $50 million on average and some have rallied “regardless of earnings,” Korea Exchange said in an investor alert published Wednesday after the market close.

Preferred shares generally pay higher dividends than common shares but lack the latter’s voting rights. The potential for higher dividends becomes irrelevant for loss-making companies not making payouts. Still, the preferreds have been targeted by Korean day traders since it’s easy to drive the share prices due to their lack of liquidity.

South Korea Warns of Retail Investor Frenzy as Preferred Stock Soars 1,270%

Amid abundant liquidity due to low interest rates and stimulus, margin financing by Korean retail stock traders has risen to an all-time high this month. The high cost of borrowing means that investors tend to quickly use their loans for short-term trades. In its investor warning, the exchange cited concerns over the possibility for stock price manipulation through the spreading of rumors and feverish price bidding in short periods of time.

The preferred stock of shipbuilder Samsung Heavy Industries Co. has surged 1,270% this month on expectations for orders of LNG carriers from Qatar, compared with a 37% gain in the firm’s common stock. The debt-ridden company has just 115,000 preferred shares outstanding and yet the issue has seen trading volume of about 1.3 million shares this month, mostly among retail investors, according to data from government-controlled Koscom.

Expectations for a Covid-19 drug in development have pushed up Ilyang Pharmaceutical Co.’s preferred stock about 306% in June, ten times its common stock’s gain. Hanwha Corp.’s preferreds have surged 270% this month while its common stock has gained 18% on bets related to the group’s stake in Nikola Corp.

©2020 Bloomberg L.P.

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