Secondary market provides a good earning opportunity to participants. Stock price of a company fluctuates based on the buy-sell process of the market participants and stock price discovery is based on the demand-supply mechanism of these participants. There are several factors which affect this mechanism. Let’s understand the core factors affecting the Indian stock market.Article Content
In the stock market, you must be aware of the difference between the mindset of a trader and an investor. Knowing this difference is the only way to understand that stock market is not a gambling place. If you are new to stock market then stock market faq will help you get a quick overview. FundsBase has also busted the most prevalent stock market fears and myths to make sure that the psychological crabs don’t pull you off the market.
There are currently seven stock exchanges in India. Of these 7, BSE and NSE are the leading ones. BSE holds the crown to be the oldest stock exchange in Asia established in 1875. NSE is the new entrant in the bourse business established in 1992 after Harshad Mehta scam emerged on BSE. Despite the new entrant in the bourse business, NSE implemented technology and brought transparency in the stock market. Retail traders prefer NSE to BSE. Both BSE and NSE have different criteria to categorize their stocks. You can find more about these criteria at BSE groups and NSE series.
Securities and Exchange Board of India (SEBI) regulates all the entities of Indian stock market including the stock exchanges and financial intermediaries. Stock market is also seen as the economic barometer of a country thus the importance of stock market in the economy cannot be ignored. It is the main reason that SEBI with its 20 SEBI departments, keeps a close watch to every action in the stock market eco-system and introduces various bye-laws to bring more transparency and build the trust of investors as well as of corporates.
Factors affecting the Indian stock market
Theoretically, stock prices of a company should fluctuate based on a company’s performance only. But just like in any other field, theories face an immense challenge in the real world of the stock market field as well. A company having very good fundamentals may seem to erode your all invested money (in short-term) without any logical reason. On the other hand, a company with weak fundamentals can skyrocket (for short-term). Although these extreme situations happen rarely and are short-lived, however they can give nightmares to a trader. Let’s see the factors that affect the stock prices of a company.
- Price rigging
- Regulatory Actions
- RBI monetary policy
- Market Sentiments
- Intra-day Speculators
- Tips provider
- Company announcements
- Global incidents
- Natural Disasters
- Political situations
- Government policies
- FII & DII
The stock market is a money-driven eco-system thus scammers are naturally attracted to it. They keep on finding the loop-holes in the system for exploitation and their benefits. One of the biggest loopholes was the price-rigging. harshad mehta scam and then the ketan parekh scam displayed exploitation of this vulnerability. Scammers, through circular trading or other malpractices, used to artificially influence the stock price of a company. Since it has been noticed by SEBI, such practices have been minimized thus this source of price fluctuation is today almost out of context. ⇯
SEBI, since its inception, has brought transparency and built investor’s trust in the stock market eco-system. It also introduced the discount brokerage and several other initiatives to increase the active participants in the stock market.
One of the main objectives of SEBI
To protect the rights of investors and ensure the safety of their investment”.
To achieve this objective, SEBI introduces various bye-laws from time to time.
One of the most important bye-laws was introducing the circuit and circuit breaker in Indian stock market. The circuit breaker was introduced to save investor’s money and stock market crash. The threshold set for stock fluctuation in both positive and negative direction called circuit. If any day, a stock fluctuates more than the threshold, the circuit is hit and the circuit breaker kicks in. This circuit breaker halts that specific stock for the pre-assigned time period or for the whole day. Circuit and circuit breaker also apply to the BSE S&P SENSEX and NSE Nifty.
Circuit breaker doesn’t apply on the stocks which have derivatives.
On one hand this circuit breaker, when halts the buy-sell of a particular scrip due to abnormal fluctuation, gives traders/investors time to go through the news and take decision patiently and let the market cool down. On the other hand, this circuit breaker does affect the demand-supply chain process. This affects the natural price discovery of that particular stock.
Reserve Bank of India (RBI) is the central bank in India which regulates the monetary policies in India. From time to time RBI revises the repo and reverse repo rates. It is based on the RBI’s view regarding inflation. If it feels that people are spending more than they are earning then it may increase the rates. The increased interest rates on credit cards and loans force people to minimize the overspending and save more in the banks. But it has a negative side as well. More interest rate means companies pay more on the loans. Industries which rely heavily on capital, suffer. Their manufacturing costs may increase thus their products may become expensive.
Thus an increase in repo and reverse repo rates may adversely affect the capital-intensive industries while a decrease may raise their stocks.
Most participants don’t follow the basic rule of delivery trades in the stock market “be greedy when the market is fearful and be fearful when the market is greedy”. They just follow the herd. If the price is going down there will be huge selling from most of the speculators/traders. According to their perspective, they are preventing their money from more losses. Same happens when prices are rising. They want to leverage the bullish environment. This is called market sentiment.
A sentiment (either bullish or bearish) if injects into the market, is followed heavily by the traders and speculators.
Market sentiments can be roughly classified into 3 categories viz. ⇯
There are three types of participants in the stock market viz. speculator, trader and investor. A speculator has no rationale behind his decision to enter a trade. These are either very new or just want to make quick money in the stock market. They follow the price movements in intra-day trades and act accordingly. For some stocks, these participants move the prices heavily.
There are several speculators/traders who solely rely on the tips by their stock brokers, news experts and analysts. There are several whatsapp groups and sms services also mushrooming to provide trading tips. SEBI is already dealing with non-registered groups and tips providers. Such tips providers and groups hugely affect the market sentiments. Usually, if a tip provider initiates a buy/sell call, it is followed blindly by its subscribers and fluctuates the price movement.
Apart from experts giving advice and tips all day, news channels are one of the best medium for updates in any industry or company. For traders, this medium becomes the primary source for the next pick. No need to mention the access of these news channels to the traders. A news about a company can hugely fluctuate its prices.
Apart from the recent changes in the news channels, which a company may not have made publicly, there are several announcements for which a company chooses the public platform. These announcements may be regarding the bonus, split, dividend or a just a management change. Reaction to such announcements reflects in the stock price in no time.
Any global incident which affects the cost of manufacturing, transportation, import-export of goods in a country, affects the stock market. Any war-like situation (either on-ground or cold war) or end of this situation also do the same thing.
Not only commodity market but the equity market is also fluctuated by a forecast of a good/bad weather like rain, high/low temperature by the meteorological department. Exempli Gratia, a good rain means good crop leading to more income by farmers. More income means more money to buy things necessary for a farmer. There may be a good time ahead for the tractor industry. A colder winter this year may be a good time for the woollen clothes and heater industry. ⇯
Natural disasters (e.g. earthquake, drought, flood, cyclones etc) bring chaos to the real life of humans. Maybe its just the way of nature telling human, who is the boss!
These natural disasters also affect stock market heavily These disasters hugely affect a company’s manufacturing cost or employee count, which in turn, reduces the revenue. It also reduces the spending/investing capacity of the society due to losses of movable/immovable assets. This results in lesser consumption of products, leading to lesser sales and revenue of the companies.
Also, as a result of these disasters, market participants don’t have the time and interest to trade/invest in stock market because they are busy to recover from the disaster.
On practical grounds politicians are also humans and they do have their own judgements. A rise of a particular political party can be hugely beneficial/lossy due to the party’s own judgement regarding the industry. A tug of war ending between two political parties after election results may also fluctuate the market either up/downside.
Every industry runs highly on the government policies. A government’s new policy may be hugely profitable to one industry but at the same time, the same policy may be disastrous for another industry. It’s also possible that a policy may be profitable to all the industries or may be disastrous to all of them as well.
Any constructive well-thought and well-executed government policy either for genuine development or for appeasement of the public may raise the prices of the relevant industry/company.
Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) do buy-sell stocks in bulk. Their entry/exit in any stock does leave a huge footprint on the stock price.
Stock market a cash driven eco-system. The buy-sell process of market participants keep this eco-system healthy and alive. Price discovery is achieved by applying the demand-supply mechanism. There are several factors which affect this mechanism viz.
price rigging, regulatory actions, RBI monetory policies, market sentiments, company announcements, global incidents, weather, natural disasters, political situations, government policies, FII & DII.
To see if market is open today see Stock Market Holiday for year 2019.