The stock market can hold an air of mystery to the uninitiated. How the price of a share is derived, why do stock market swing so drastically, should one buy or sell, whats the real worth of one share versus another are all areas of concern to the potential investor. We will try to answer some of these questions with respect to the current Stock Market environment.
Some of you even feel that Stock Market investment is a gamble. It is not exactly true, Some investors do invest in Stock Market purely to speculate, however Stock Markets play an important role in a Nation’s economy. To start, let us look at the purpose with which stock markets operates.
Purpose of Stock Market
The stock market exists in any country primarily for the purpose of assisting corporations and governments to raise the capital they need to fund their operations. At the same time, investors exert an influence on the national economy by contributing to its capital base while receiving a return on their investments.
The stock market is an ever-visible barometer of a nation’s economic vitality. The stock exchange is an efficient allocator of scarce capital resources from net savers, both individuals as well as institutions, to net users of the savings, mainly companies listed in the Stock Market. It increases productivity and value added which, of course, benefits the whole community. The efficient allocation of capital resources by definition enables the best rate of return to be earned for the capital that is invested. This process is facilitated through the operation of the stock exchange. It is the vehicle for the essential marshaling and distribution of capital, which is the prerequisite for economic development in a capitalistic system.
Key Advantages of investing in Stock Markets
- shares have the capacity to produce both income and capital growth;
- over the long-term they will outperform all other investments;
- shares provide a hedge against inflation;
- shares can yield tax advantages through dividend imputation;
- shares can be bought with lower transaction costs (brokerage, duty etc.) than managed investments and property;
- shares can be more readily bought and sold than property holdings; and
- shares have the capacity to provide good dividend yields that grow over time.
Why did the Stocks Markets bounced back post Election 2009 results?
Markets hit Upper Circuits – Left was out, and retail investors were left out.
This week, the benchmark indices touched two upper circuits on Monday after UPA’s (United Progressive Alliance) one sided win in the Lok Sabha Election 2009. PersonalMoney.in had predicted favorable response from the Market if UPA Forms the Government without Left Parties Support, however the market pleasantly surprised even us when it closed in upper circuits on Monday.
There were many reasons for this upward movement in the Stock Markets :
- Favourable outcome from Election 2009
- Many individual as well as institutional investors were holding cash and were waiting to enter the markets post election.
- Large F&O positions were build before election results were announced, many market players had to buy stocks from the Cash Market Segment to contain their losses in the F&O segment.
- Some market operators had gone short in the F&O Segment, and had to cover their position which drove the Cash Market prices up.
Will the Stock Market Up-trend continue?
In this week, the market reported a record turnover, ever. which means that the total amount of trades that took place in the Stock Markets this week was an all time high. However, the question which many small and large investors are asking is, will this up-trend continue?
Well, PersonalMoney.in did advised you to buy front line large-cap stocks in our earlier post “Is it the right time to enter stock market?” dated March 11, 2009, with a caveat that market may give short term pains but long term gains. The BSE Sensex was at 8343.75 points then, this week the market closed at 13,887.15 points, a gain of a whooping 66.44%. We still maintain the same view for the market going forward.
Should you Buy or Sell stocks?
The Finance Minister has promised to come out with the Budget for the year 2009-10 within 45 days of Government formation. Market Analysts expect that he could doll-out some good news for the corporates as well as individuals in the budget. This will act as another stimulus for the market in a few days. In the meanwhile, markets will remain volatile. Directions of the global markets will have an impact on Indian markets as well. You should hold on to your stock positions and buy large cap stocks only on declines. Small and Mid cap stocks may carry a larger risk, so you may avoid them for now.
Our objective is to provide you guidence and enable you take control of your investment in the long term. We believe that the short term market swings may impact you momenteraliy but a careful selection and regular investments in Stock Market will provide a distinct advantage over other investment asset classes over long period of time. If you are new to Stock Markets, it would be advisable if you put your money in Mutual Fund schemes that invest in large-cap stocks, instead of taking direct exposure to equities.
Disclaimer : PersonalMoney.in and/or its authors take no responsibilities whatsoever for any loss that you may incur based on acting on the opinion expressed in our articles. We are not certified investment advisers. You and solely you are responsible for your investment decisions. We suggest that you seek expert guidance from Certified Investment Advisers before taking any investment decision. Investment in Stock Markets are subject to various risks.