by

V Subramanian

PREFACE

Capital markets worldwide are subject to huge volatilities – both upsurge and downfall.  But the countries which call themselves as champions of globalization and economic liberalization look at capital markets functioning as the true and perfect index of their economic growth and success.  Nonetheless, there are so many other economic indices that need to be studied and compared so as to arrive at the total picture.  For instance, employment generation, national income, inflation, index of industrial production, gross domestic product, foreign exchange assets, internal and external debts, local currency’s appreciation/depreciation against all major currencies of the world, major breakthroughs achieved in science and technology, space science etc. are such indicators.  Equally important is the progress achieved in social indicators like education, health care, infrastructure, transport and communication, quality of governance as reflected in taxation policies of the government, corruption, transparency and law and order of the society.  Without achieving real, visible progress in these areas, any amount of economic growth will be a mirage and short-lived.

The present UPA government is going the whole hog in promoting capital markets, at the cost of consistent, stable and healthy national savings.  Lot of incentives in the form of tax free dividends, long term capital gains etc. are given to people who invest in company stocks.  The latest ‘Rajiv Gandhi Equity Savings Scheme - 2012’ (RGESS) is also a step aimed at attracting first time investors to the stock market.  Many incentives and exemptions given to conventional instruments like Bank Deposits, National Savings Certificates etc. are gradually being diluted or abolished.  Withdrawing of Section 80 CCF for exemption of investment up to Rs.20,000 in long term infrastructure bonds from this financial year (2012-13) has also met with widespread criticism and incurred the resentment and anger of the individual investors.

Now, let us see the merits and demerits of capital markets.

MERITS

1. 1) A good entrepreneur with low financial resources will find stock market very useful and attractive to translate his dreams into a reality.
2. 2) Banks demand collateral security and collect high rate of interest.  Moreover, many stringent conditions are stipulated and tight monitoring also is put in place.  This affects the freedom and privacy of the entrepreneurs, creates hurdles in their day to day affairs and kills their enterprising spirit too.
4. 3) Stock market helps entrepreneurs with bright ideas to mobilize funds at very cheap cost. 
5. 4) Moreover, funds so mobilized need not be returned to the investors by the promoter. 
7. (5) The risks in the venture get distributed amongst a vast population and everybody's liability is limited to the extent of the amount (purchase price) of the shares held only.
8. (6) If someone wants to buy more shares, he/she can approach the stock exchanges and buy additional shares at the prevailing market price, which is usually at a premium to the face value of each share.
10. (7)Similarly, when someone needs liquid cash or wants to exit a particular stock due to a variety of reasons can sell such shares in the stock market.
11. (8) When someone wants to sell some shares, there will be someone to buy them and vice versa.
13. (9)Usually, the returns on equity shares are high and attractive, as compared to the other avenues for investments.

DEMERITS

2. (1) In case of shares traded in low volumes, buying and selling become very difficult and to determine the correct market price share is also a challenging task.
3. (2) Since most of the trade transactions are done by impulsive and speculative behaviour of the participants, often their decisions go wrong and the retail investors are the worst affected.
5. (3) Insider information gives an unfair advantage to some company executives and also the brokers close to them.
6. (4) The regulator cannot watch all the stocks, all the time. So, the individual investor must be cautious, while dealing with stocks because of high degree of volatility and risks involved.
8. (5) Greed of the investors leads to catastrophe very often.
9. (6)Many companies become sick but not their promoters.  They are not blacklisted and prevented from starting new companies.  This is the biggest flaw in the system.
11. (7) Many investors go by market sentiments and they do not know anything about the company whose shares they want to deal in.  Knowing the fundamentals of a company is very important to remain in the stock market.
12. (8) High degree of volatility of some stocks brings uncertainty and great risks.
14. (9) Stocks traded within a narrow band for a longer period do not bring cheers to investors who want to make quick money.
15. (10) In spite of a total ban on kerb deals (deals clinched after the closing hours of the stock exchanges), they are said to flourish even today unofficially.
17. (11) Greater transparency is needed in fixing the price band for each share at the time of IPO (initial public offer) and FPO (follow on offer).  The mechanisms involved, assumptions and presumptions made, composition of the decision making team and their mode of selection etc. are to be made public by each company.
19. (12) ‘Private Placements’ and ‘Buy back’ of shares by the companies concerned also need more transparency and the whole process in this regard must be an open affair from the beginning till the end and made accessible to each interested person – not just investors alone.

SOME USEFUL TIPS TO OPERATE IN STOCK MARKET

2. (1) Never be misguided by sensitive information that has no basis.
3. (2) Analyze a company's background, its promoters, its activity, its financial strength, its group companies’  position, past trends in the trading of stocks of the company,  published annual report for the past 2 or 3 years, information in the website of Ministry of Corporate Affairs regarding the particular company etc. very thoroughly.
5. (3) Seek the guidance and advice of some familiar and reliable persons.
6. (4) Reserve the ultimate decision making to yourself.
8. (5) Buy a share when its price is falling and sell a share when its price is peaking. 
9. (6) One important rule is one must have a stop loss limit in both the cases.  Once this threshold limit is breached, activate the buy or sell decision without any hesitation.
11. (7) To know this threshold limit, study of past trends at least for the past 52 weeks will be immensely useful.  High and Low of past 52 weeks, average price during the past year by using moving averages method, volume of daily trade in a particular stock etc. are some of the tools used by professionals.

GOLDEN RULES

1. (1) Keep your portfolio  well diversified .
2. (2) Never enter into intra-day trades unless you have a very fair idea of the market behaviour and the movements of a particular stock you wish to trade in.
4. (3) Never attach sentiment to a particular stock.
5. (4) Do not invest all your money in stock market.  It is highly risky.
7. (5) Do not invest in a new/unknown company's stocks.
8. (6) Do not simply go by the reputation of the holding company alone, in case of a newly started project/venture.
10. (7) Trading in secondary market calls for specialized knowledge and skills and professional expertise.
11. (8) As already discussed above, never wait until the stock price reaches the new peak or new bottom level.  Here the concept of stop loss limit comes in handy.
13. (9) Averaging the price of stock already bought at a higher price, by buying additional shares when the price reaches lower levels is a wise decision.
14. (10) It is very important to know the correct face value of each share you trade in.
16. (11) Company's dividend payout record, history of allotment of fresh shares on rights basis, issuance of bonus shares etc. will reveal more useful information.
17. (12) Keep track of the price movements of the shares you are interested in.
19. (13) Watch/read all the news that appears in the media about a particular company with which you are associated.
20. (14) Watch out for regional, national and global trends of each field/industry before you form an opinion about a company.
22. (15) It is not sufficient if a particular company does well in the market.  Majority of the companies engaged in the same activity or profession also must be kept track of.
23. (16) Government’s policies on licensing, taxation, imports and exports, availability of financial support from the government and the banks/financial institutions, interest rates, pollution control and labour laws impact the growth prospects of a company greatly.
25. (17) Rapid technological changes sweeping across all industries and fields will also affect the future of a company.
26. (18) Do not resort to any legal/statutory violations, in order to earn unnatural and huge pecuniary gains.

CONCLUSION

Of late, the market regulator (SEBI) has been taking several steps to check high degree of volatility in the stock markets, fuelled by insider information and harmful rumours.  Most notable among them are screen-based trading (electronic trading) and necessity to have a demat account to engage oneself in buying and selling of shares.  

Some more grievances remain in the area of more transparency in the allotment of shares, declaration and distribution of dividends, disposal of unclaimed dividends, dealing with individual complaints etc.  To address these issues, awareness is necessary among the individual investors.  Investor education is an area that is growing now and several agencies like SEBI, Stock Exchanges, Ministry of Corporate Affairs, Banks/Financial Institutions offering ‘portfolio management services’, Mutual Funds and the media are showing keen interest in educating the common, retail investors suitably at regular intervals, by conducting seminars and workshops at various places, advertisements, campaigns and news items.  Though things have changed much better as compared to the situation that prevailed 3 decades ago, there is a still long way to go.

ALL THE BEST FOR YOUR FUTURE DECISIONS.