Despite the U.S. Nasdaq index continuously reaching new all-time highs, South Korea’s KOSDAQ index remains stagnant, highlighting stark differences in market performance and growth dynamics over the past two decades.
However, over the past 20 years, when looking solely at the market capitalization growth rate of the index components, KOSDAQ has actually outpaced Nasdaq. Experts believe that practices like stock splits and overvalued IPOs have slowed down the overall rise of the KOSDAQ index.
According to the Korea Exchange (KRX), the KOSDAQ index closed at 860.42 on July 9. While it regained the 860 mark after 14 trading days, it remains below its starting value for the year (866.08) and 62.15 points (6.7%) lower than the yearly high of 922.57 recorded in Mar. 2024. In contrast, the Nasdaq index closed at a record high of 18,403.74 on July 8 (local time), having risen 3,392.39 points (22.6%) this year.
Looking at a longer period, the rise of the Nasdaq index is notable compared to the KOSDAQ. From 1,935.32 on July 8, 2004, the Nasdaq index has increased by 9.5 times to date. Meanwhile, the KOSDAQ index has only risen 2.3 times from 370.14 on July 9, 2004.
However, when considering only the growth rate of market capitalization of the index components over the same period, the KOSDAQ outperforms the Nasdaq.
The market capitalization of the KOSDAQ index increased 14.2 times from 29.6 trillion won ($21.3 billion) to $302.6 billion. In comparison, the Nasdaq index grew 10.2 times from $2.92 trillion dollars to $29.7 trillion.
Both KOSDAQ and Nasdaq calculate their indices based on market capitalization weighting. However, while the Nasdaq index has increased in line with its growing market capitalization, the KOSDAQ index shows a significant discrepancy due to the large number of shares issued.
The number of listed shares on the KOSDAQ market increased 4.6 times from 11.9 billion shares in July 2004 to 54.7 billion shares currently. Although the market capitalization of the KOSDAQ market has increased, the number of shares has also risen, diluting the value of each share.
Conversely, in the case of Microsoft, which holds a significant proportion in the Nasdaq index, the number of outstanding shares decreased by 31.7% (3.4 billion shares) from 10.8 billion shares in 2004 to 7.431 billion shares due to share buybacks. Apple also saw a 9% (1.5 billion shares) reduction in outstanding shares over the past five years.
There are several reasons behind this. Firstly, there is the problem of overvaluation during the listing process. Venture capital investors frequently use Initial Public Offerings (IPOs) as an exit strategy to recoup their investments. To maximize the recovery of their funds, companies are often valued higher than their actual worth, resulting in overinflated IPOs.
Consequently, the number of listed shares increases with IPOs, but the stock price repeatedly falls below the offering price. In short, as new stocks are added to the KOSDAQ index, the total market capitalization increases, but the average value of the stocks declines.
There is also the issue of simultaneous listing of parent and subsidiary companies, which many believe hinders both the KOSDAQ and KOSPI indices.
When a parent company spins off its core business unit into a separate company and lists it on the stock market, the number of listed shares increases. However, since the overall value of the company doesn’t change, this can dilute the index’s value.
