Never Ignore the Basics of Stock Market
There are many forms of investment like fixed deposits, mutual funds, bonds, and the stock market. Out of all these options, the stock market remains the most popular form of investment by the middle class in India. Of late, the fixed deposit rates have reached their minimum level. Therefore, to get good returns, people are increasingly turning towards the share market. But to ensure good returns on investment, you should be familiar with how the stock market operates.
Never ever be carried away by what people usually tell you about the stock market. The most important thing you need to consider is the fundamentals of the market. Because once you start ignoring the basics, nobody can save you from losses. Newspapers, television channels, and Indian social media often tell stories of astronomical returns in the stock market. But most of them are pure lies whose only purpose is to dupe people with their hard earned money.
Why is the share market on the rise when the entire economy is suffering?
It’s very surprising that with all that bad news coming from the Indian economy, the Indian stock market is touching new heights. The risk of Covid-19 pandemic still remains very high, because till this date only thirty percent of the adult population of the country has been vaccinated. Therefore, the so-called third wave of pandemic is very much on the card.
If that happens, we will again face the lockdown bringing everything to a grinding halt. This will have a debilitating effect on personal income and consumption. Millions of jobs will be lost, and unemployment will rise to an unprecedented level. India is least prepared to face a crisis like this, especially when the national income is still struggling to reach the level of two years ago.
There is no doubt that the common man is currently going through one of the worst economic crises of their lives with an all-time high inflation, the prices of petrol and diesel hovering at more than 100 rupees a litre because of excessive taxes on fuel and rising commodity-food prices. If that wasn’t enough, even the prices of manufactured goods have increased.
The government is left with no option but to borrow from the open market. This in turn has adversely affected the return on bonds. Although the Reserve Bank of India is trying its best to keep the prices down, the market has its own rules. It doesn’t operate on emotions but hard economic facts. Factors such as high inflation, low demand, shrinking national income, high interest rates, dwindling Federal Reserve, and slowing down of bank’s asset purchases should be bad news for Indian stocks? Despite all these encumbrances, the stock market is presently at its highest level. How is that possible?
Demonetization, GST and the Digital revolution
To explain the complexity of the skyrocketing stock market, there are many forces at play that need to be discussed. Since we cannot include everything in this article, let’s discuss some important factors. In fact, the flow of cheap credit in the West, especially in the US, pushed up asset prices around the world. The Indian stock market was no exception, and was also buoyed by this incredible inflow of dollars. This has increased our national foreign exchange reserves to an all-time high of more than 600 billion dollars.
Besides, there have also been many economic decisions by the government of India that have hugely affected the economy in the last five years. It began with demonetization in 2016 followed by the GST in 2017 which made it even worse. Finally, the digital revolution took place in 2020 triggered by the onset of Covid19. All these factors led to formalization of the Indian economy on a large scale. Because of this, small, unorganized, and informal sectors were literally swallowed by the corporate houses. If we look at these developments from another angle, we will find that the organized corporate sector has increased our national income. And this has mainly benefited large companies, increasing their market share and product prices, as wages and self-employed earnings started falling.
Stock market Represents Big companies, and Not the Entire Economy
Can you answer a basic question- what is the stock market? Isn’t this the combined sum of the market value of the big companies? Often we fail to understand that the stock market is not the benchmark of the entire economy. It’s representative of only a few big companies, and not every company in India. For example, Sensex considers the market capitalization of only top performing 30 companies. The earnings of these big companies may have increased by 40% last year, but they are thriving on the strength of smaller companies. That is why indicators like sensex and nifty, that keep track of their share prices, should be at their highest level. This is the reason why the stock market has climbed while the rest of the economy is in distress.
When everyone becomes a stock market analyst
So when there is a boom in the stock market, a kind of bubble happens in the market, and even penny stocks start doubling every month. As a result, the total market capitalization becomes much larger than the GDP. Like at present, it is currently at a 13-year high at 115%.This is when people start borrowing money to invest in IPOs at an apparently artificial valuation. The fresh fund raising is at an all-time high in the last 14 years, when we still have five months of the year left!
The year 2021 will witness the biggest IPOs and fund raising in the history of India especially after the stellar debut of Zomato, and Paytm, the second loss-making company dreaming of raising more than $2 billion. This is a crazy time for the stock market when the shares of unlisted companies in the gray market increase by a hefty 20 to 30% in a month, and buyers expect cash from an already anticipated IPO.
But you should never forget what caused the 2008 recession, when the market was down by 75%. It’s time to refresh your memories. When the IPO of Reliance Power made its debut, speculators had bid more than Rs 8 lakh crore. I am not trying to say that in 2021, the same story will be repeated but Zomato has received a whopping Rs 2 lakh crore for its IPO, which is the third largest IPO and by the end of year, Paytm can even break Reliance Power’s record. Just keep watching it.