A ‘Theme Stock’ phenomenon in Korea’s stock market
2012 is an election year in South Korea, and as usual ‘theme stocks’ that are believed to have connections with a certain presidential candidate, have gone up outrageously. There are a lot of stocks that people consider as potential ‘theme stock’ and once someone starts to provide even a little evidence of the connection between a certain company and a certain presidential candidate, some investors would start buying the stock and other investors who often follows other investors, starts to buy the stock without considering the real value of the company. This ‘theme stock’ phenomenon is the example of cascade can be wrong, and back in March 2012, a group of investors who actually manipulated ‘theme stock’ and made profits of 4.8 million dollars has been arrested.
A investor who invests in a ‘theme stock’ do not really care about the actual value of the stock. So, when a group of investors starts to claim a certain stock as a ‘theme stock’ and provide an evidence of the connection between the company and a presidential candidate, some investors who often invest by following others start buying the stock without any reasonable assessment of the company, but with a vague hope that when the presidential candidate is elected, the company will somehow get some benefit. Since no one really considers the actual value and just following other investors, no one knows how high the price will go. In other words, the manipulators can easily raise the price until it reaches their goal. Even if the price reaches the manipulators’ goal and they sell all their stocks, the price will go up a little more, because there are still some investors who want to be a part of the cascade. However, remember that the cascade with a little information is easy to start, but easy to end. Soon, other investors will not going to buy the stock, because the price of the stock is ridiculously high, and so soon enough price will drop significantly. For instance, in this case, after the manipulators sold the stock, the price went down 50% compare to its highest price. Although the manipulators were arrested, other investors already lost significant amount of money, and tragically this happens in Korea’s stock market every election year. In short, ‘theme stock’ phenomenon in Korea’s stock market shows that cascades can be wrong and cascades based on very little information are fragile.
http://english.donga.com/srv/service.php3?biid=2012031089158
-LonelyCube