Korea's Penny Stock Purge: Shock Wave Hits Investors! What Will Happen Next?

South Korea is seriously considering a shakeup of its stock markets, and it could mean saying goodbye to a lot of Penny Stocks. Financial regulators are mulling over a plan to delist companies whose shares are languishing below 1,000 won (that's about 68 U.S. cents). The rationale? It's all part of President Lee Jae Myung's push to inject new life into the nation's capital markets.

Korea's Penny Stock Purge: Shock Wave Hits Investo...

Now, you might be thinking, "How many companies are we talking about?" Well, according to the Korea Exchange, as of last Friday, a whopping 170 companies listed on the Kosdaq, the tech-heavy exchange, were classified as Penny Stocks. That's roughly 10% of all the firms listed there (1,822 to be exact). The good news is that it is down from 178 companies at the beginning of the year. But it is still a pretty steep increase from early 2024, when only 123 stocks were in the bargain bin.

What's truly head-scratching is that this surge in penny stocks happened while the market, on the whole, was doing pretty well. The Kosdaq index actually climbed quite a bit during the same period, jumping from 878.93 to 1,080.77. It's like watching weeds grow in a perfectly manicured garden. On the main KOSPI exchange, there were 56 penny stocks on Friday. So all in all, a lot of stocks potentially on the chopping block.

Here's the thing: penny stocks, while tempting for some, are often linked to high volatility. They can be susceptible to wild speculation and, unfortunately, even price manipulation. That's why the authorities are seriously asking themselves if they should explicitly add penny stocks to the criteria for delisting. Right now, the decisions are mostly based on market capitalization and revenue, which can leave some struggling but not quite "dead" companies hanging on.

Lee Eog-weon, who chairs the Financial Services Commission (FSC), made a pretty compelling point. He noted that major international markets already have much stricter rules about penny stocks. He specifically mentioned the Nasdaq, where stocks trading below $1 can get the boot. "We need to boldly adopt similar standards to decisively clear out unhealthy products so innovative companies can take their place," Lee said during a recent appearance before the National Assembly. It's a bold statement, and it suggests a significant shift in how Korea views its stock market health.

Of course, the authorities aren't just blindly copying other markets. They're studying international examples to figure out the best delisting rules for Korea's specific market structure. This makes sense. What works in the U.S. might not be the best fit for South Korea.

Most experts seem to be on board with the idea of phasing out penny stocks. That said, they are also stressing that any new rules need to be crystal clear and objectively measurable. You don't want to punish companies that are just temporarily undervalued. "There are cases where stock prices fail to properly reflect a company’s underlying asset value," says Kim Dae-jong, a business professor at Sejong University in Seoul. "Asset-based criteria could also be considered as part of the delisting framework." In other words, it's a balancing act. We'll see how this plays out, but it's certainly a development to watch for investors in South Korea.