The Multitopic Blog

Since last few months, there has been immense increase in the Bombay Stock Exchange (hereinafter BSE) index, and it is touching all time high everyday and bulls (people who try to increase the market price of share and make profit by such increase) have virtually ruled the market. The basic question that comes into to mind of a normal investor is that is this Bull Run good, i.e.; is it safe to invest money in such a situation or whether to wait and invest later.

The basic reasons for hike in stock market index are: -

1. Performance Based – If the performance of the companies operating in the stock market is good, it leads to increase in Earning Per Share (EPS) of the company that increases the Market Price of Share of the company. Now it is to be remembered that this situation is welcome since the increase in the stock market index was due to performance of the companies. Now, it has to be noted here that the start of the boom in the BSE index was in November 2004 when the quarterly results of the performance of the companies were announced, since those results were very good and almost all companies showed 30 – 40% increase in their profitability hence there was increase in the stock market which was welcomed.

2. Liquidity Based – The second reason for rise in Stock Market index is due to increase of liquidity in the Indian Stock Market. This means that since the performance of the companies operating in the stock market was very good, many domestic and foreign investors were attracted towards Indian Market. Now it has to be remembered here that the foreign investors approach the stock market in the form of Foreign Institutional Investors (FII) and Foreign Direct Investment (FDI), and it is the FII’s that invest directly in the stock market. The large investments made by FII’s were a major reason to increase the stock market index from 6000 – 8000 in 2 months in mid 2005. Now, there has to be a word of caution that has to be adopted while investing in stock market that is booming due to large liquidity due to investment of FII’s. This is due to the reason that the FII’s are fair weather friends and they are investing in the Indian Market for the basic reason that they are getting better returns from India than any other country and the day they find that they would get better return from any other country’s stock market, they would stop investing in Indian Stock Market and divert their funds in the other Stock Markets of other countries. This would lead to collapse in the Indian Stock Market and the domestic investors would loose to a large extent. But fortunately, till date India is the best market for FII’s and they are pumping in money at a large volume and hence stock market is booming.

3. Operator Based – Now the third and the worst reason for the hike in the Stock Market is operator based i.e.; investing by Bank Guarantee procedure and through Non Banking Financial Corporations (NBFC’s). What happens is that many unscrupulous investors take loan from the bank on promise that they would return the same at a very high rate and float shares in the market luring the innocent investors that their EPS is very high, and when the small investors invest large amount of money in such unscrupulous companies, they disappear from the market and the investors loose their money. Now these actions and manipulations of investors were major reasons for increase in Stock Market from 8000 – 8500 in just 1 week and investors have to be very cautious while investing in the Stock Market when the boom is due to manipulations of such unscrupulous investors. They should first make all investigations about the companies before investing. Also, here it is to be noted that Indian Government had also made a team to look into such matter and identify such unscrupulous operators to prevent crash in the Indian Stock Market and those operators that did not had asset backing were not granted loan and this helped at a great extent to reduce the number of unscrupulous investors in the Stock Market.

But now it has to remembered is that in September 2005, the Stock Market Index was around 8500-8700, and it also went down in between and again regain its position and this rise was due to expectation that quarterly results of the companies this time would also be very good whose probability is very high. Hence, at present it is safe to invest in the stock market and to insure good return the investors should invest in the big guns of the stock market and before investing in the small companies they should make all research and investigations about the companies.