Adani crisis: Investors’ Dilemma

Selling is bad when it is dictated by fear
"The basic question at the moment is: Should investors see the Adani stocks mayhem as an opportunity to buy more shares? The experts say the answer is best left for time to tell." [Creative Commons]
"The basic question at the moment is: Should investors see the Adani stocks mayhem as an opportunity to buy more shares? The experts say the answer is best left for time to tell." [Creative Commons] Wikimedia Commons/ Adani Arena

A group of local investors at a private stock broking outlet engaged themselves in discussing the nitty-gritty of the stock market. They were sharing their nerve-wracking experience in the stock market and most of them had been victims of market crashes in the past.

Now Adani Group’s rout in the market has locked them in confusion as they stand invested in the market and are also active in trading activities. They were asking contradictory questions to each other.

The confusion and the unrest among the local investors emerged when the Adani Group stocks erased more than $118 billion in market value triggered by a report on January 24 from a small but significant US short seller Hindenburg Research.

The Adani Group has been accused by Hindenburg Research in its report of ‘brazen stock manipulation and accounting fraud scheme over the course of decades.’ Even as the Group came out with a rebuttal to reassure investors, the conglomerate continued to face the heat.

The financial regulators such as Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) were forced to issue statements to control the damage and let the investors’ confidence remain intact on the financial markets.

Notably, the National Stock Exchange (NSE) placed three companies of the group, including Adani Enterprises, Adani Ports and Special Economic Zone and Ambuja Cements, under short-term additional surveillance measure (ASM) framework. 

ASM is an initiative to enhance market integrity and safeguard the interest of investors. ASM concerns are based on objective parameters with price, volume variation, volatility etc.

The basic question at the moment is: Should investors see the Adani stocks mayhem as an opportunity to buy more shares? The experts say the answer is best left for time to tell.

At the moment, it is clear the Hindenburg report has opened the floodgates for the Adani Group to come clean on its balance sheet and shrug off allegations in all manner possible. 

As the events continue to unfold in the aftermath of the Hindenburg Research report, retail investors who have invested their hard earned money in the stock market are genuinely unnerved. They may be in a dilemma of ‘to be or not to be’ in the market during this unprecedented crisis which is yet to unfold fully.

At the moment, nobody, even the best brains in the market, can predict the future course of the stock market as the stakeholders of the Adani Group are yet to measure the impact of the crisis on their operations.

Should one exit the market after Adani Group’s fall from grace? Or, should investors stay invested under the given circumstances? The exact answer to either question is usually not so straightforward. The correct answer for one investor may be the exactly wrong answer for another.

How to understand the market in the current crisis?

Unpredictable and ever changing nature of the 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 prices remaining stagnant and always 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 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. 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, 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 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. 

How does the share price impact a company?

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 are companies so obsessed with their stock prices? After a company has issued shares, why should it care about pricing of its stock in the market?

Normally a falling price can severely hit the 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 the overall business of the company directly.

But in a specific fall shares of a particular company witness a fall, which may see a sharp fall in share price relative to other companies or the rest of the stock market. Why do companies witness a specific fall in their shares?

Of course, the fundamentals of the company may have weakened and investors show their shaky optimism about the 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.

How should an investor evaluate selling and buying decisions of stocks amid the Adani crisis?

You have to keep it in mind if buying at the right price is vital; selling too is equally a vital link. It’s selling which decides your profit and loss in the investment matters. If you can’t sell at the appropriate time, the benefits of proper buying disappear.

No one wants a loss while being in the stock market. But if it happens, don’t let your ego get in the way of making the right decision. Most of the time, the best course of action is to cut your losses and move on to the next deal.

Meanwhile, selling a stock is triggered by two things – either it may be personal reasons or may be market driven. You may find your risk tolerance reaching to maximum and you immediately off load the stock and reinvest in a new stock.

Sometimes an ‘unexpected’ happens and you need cash to negotiate that ‘unexpected’. So you lay your hand on your stock for this financial emergency. Or you may find the stocks in your investment portfolio not matching your moral and ethical values and you sell them.

The stock falling to unexpected levels are some of the market-driven reasons which may prompt you to sell the shares. There may be other valid reasons to sell, but it’s important to evaluate your selling decision in the context of all the alternatives and consequences.

Precisely, when a sale results in a loss, and is accompanied by an understanding of why that loss occurred, it too may be considered a good sell. Share market experts say selling is bad when it is dictated by fear. They want investors to always focus on selling dictated by rational reasons of valuations and price.

DISCLAIMER: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK.

Related Stories

No stories found.
Greater Kashmir