Amid the mayhem and devastation caused by the outbreak of coronavirus pandemic to the life and economy, a sort of festival is continually hitting the Indian stock markets. While writing this column, I could feel the festive mood among the market players through their statements when the stock market benchmarks Nifty and Sensex hit new lifetime highs today (August 03). The Nifty hit 16K mark which investors called a historic day for the market, while the Sensex hit a record high level of over 53K at the end of the day. However, the festive mood among various segments of the market players including the investors and the experts is loaded with apprehensions. Veteran investors are observing cautious approach while reaping benefits of the surge in the markets while other retail investors are in merry-making mood giving little or no attention to the risks associated with the market.
During the period of Covid-19, we have seen substantial increase in the participation of retail investors. It’s interesting to note that the volume of trading by foreign and domestic institutions has declined. , However, contrary to this, the amount of retail participation has gone up significantly. There has been a sudden rise in the number of demat accounts held by individuals, which, according to a report, saw an addition of 14 million accounts in 2020-21. This is almost three times higher than during the previous financial year.
Most of the new post-covid entrants are first-time investors in the markets and are mostly lured by the market gimmicks. However, they have been enjoying the flight of markets to record-breaking levels so far.
Enthusiasm among our local gullible investors (I call most of them raw investors as they swim in the market without knowing the art of swimming) too is high and are resorting to investing-spree in the markets. I am privy to the situations where scores of among these local investors have disposed-off some of their assets to enter the markets with an intention to make quick bucks. A case in point is one of my acquaintances who sought opinion to invest in the market. Actually, he is lured by the quick money-making stories of the markets despite Covid-induced economic recession. He wants to invest a particular amount in equities of different companies for a shorter period to earn substantial amount. The purpose of his investment is to make substantial money for construction of a house. He thinks the investment in shares at the moment is better option than obtaining a loan from a bank.to bridge his shortfall of funds required for the construction of a house.
The fact is that one should not use equities as a channel of generating financial resources for the projects like construction of a house etc. The returns on investment in equities can be volatile in the short and medium-term, and one could well end up losing the money. There are certain things which you as an investor need to know and understand while making entry into the markets.
Unpredictable and ever changing nature of stock market is not something new. The stock market is an investment arena which lives with a life of its own, reacts to situations and leaves investors either reaping profits or with nothing at all. A range of factors affect the market, starting from company related news to macroeconomic trends like inflation, rupee gaining or weakening, oil prices etc.
In light of these factors, it's the price movement of the stocks which is the most vibrant thing happening in the market. It makes and simultaneously breaks the fortunes of investors. Here somebody's gain is someone's loss. We hardly see stock price remaining stagnant and always remains swinging. The prices move up when more people want to buy a stock than to sell it. This situation triggers demand. Prices witness fall when more people resort to selling of a stock than buying it.
In this scenario of demand and supply theory, it is the greed and fear among the investors which plays a major role in driving the stock prices. Investor psychology is that they buy when they feel the stock is affordable and off-load it when they feel the stock is already over-valued. They resort to selling of stock mostly to buyback when the price drops later.
What ignites change in demand and supply of stocks? Why do stock prices change? When we try to find an accurate answer to these queries we find a section of believers who believe that it isn't possible to predict how stock prices will change. While others think that by drawing charts and looking at past price movements, we can determine when to buy and sell a stock. Amid this confusing situation, the only thing we know is that stocks are highly volatile and exposed to rapid change in prices. Precisely, there is no consensus as to why stock prices move the way they do. Though there are certain economic and financial indicators like inflations, interest rate scenario etc that contribute to the movement of stock prices, a lot remains hidden behind this price movement game.
Here let me tell you something about market psychology. There are analysts who link pricing of a stock to the performance of a company. But it is also a fact that stocks of companies with good numbers see their stock price falling. This means, the market psychology has nothing to do with the strong fundamentals of a company. The problem is to know what the market psychology is for a particular stock. Things like the state of affairs of the company & the industry, the can help you to make an educated guess on market psychology, but it is impossible to know how each and every factor will affect a stock price. Market psychology cannot be read into a chart pattern.
Meanwhile, one of the most common queries about stock price is regarding its impact on the company. Most of the people get confused when the company shows concern over the performance of its stock in the secondary market. Notably, the company that issues the stock does not participate in any profits or losses resulting from trading of its stock. Then, why companies are so obsessed with their stock prices? After a company has issued shares, why should it care about pricing of its stock in the market?
After the shares of a company are listed in the stock markets, it’s the buyer and the seller who make profit or loss out of the trading of shares. During the transaction they set the price of the stock. But this pricing has a profound effect on the company and determines health of the company. Stock analysts say that among many factors influencing stock prices, the most important is earnings by the company which has issued the stock.
Normally a falling price can severely hit morale of a company. There are basically two kinds of falls in shares - general fall and specific fall. If there is a fall in general share prices then the company would not get impacted too much. In a volatile environment, rise and falls in the share prices won’t affect overall business of the company directly. But in a specific fall shares of a particular company witness fall, which may see a sharp fall in share price relative to other companies or rest of the stock market. Why companies witness specific fall of its shares? Of course, the fundamentals of the company may have weakened and investors show their shaky optimism about prospect of the company to perform its businesses in the given situation. In this specific fall in share price scenario, the company becomes vulnerable to a large scale shakeup.
Precisely, Looking at the markets for making wealth is not a bad idea. It turns bad when an investor ignores markets and tries to cross the road when a red light is on. The best thing, especially for the raw retail investors, would be to seek guidance of a market cnsultat before investing in the market.
(The views are of the author & not the institution he works for)