SEBI's new norms trigger sell-off

Jul 27, 2012

As an investor, why would you want to invest in small cap stocks instead of the relatively safer large cap blue chips? There is only one answer- to earn higher returns. If you invest in fundamentally strong small caps, the potential for multiplying your wealth is huge. But there is a caveat. Small and mid caps are inherently much riskier than their larger counterparts. On account of the low market cap, they can be frequent victims of price rigging by stock operators. In many cases, the perpetrators are none other than the promoters themselves. Price rigging is quite rampant amongst stocks in the derivatives segment as the trading interest therein is pretty high.

Under the hitherto framework, it had become easy for operators to get their counters into the derivatives segment. It was only recently that market regulator Securities and Exchange Board of India (SEBI) tightened eligibility and exit criteria for stocks in the derivatives segment. Following SEBI's decision, some allegedly operator-driven stocks in the derivatives segment crashed yesterday. An article in MoneyLife argues that in many of these cases, promoters themselves held large trading positions in concert with their crony brokers. The magazine believes that promoters funded their positions by pledging their shares with financiers. SEBI's move to change norms caused panic among financiers who then resorted to offloading the pledged shares to recover their cash. Such sudden selling of these select stocks caused them to witness sharp declines. Moreover, it had a ripple effect on several other small and mid cap stocks as well. The chart of the day shows some of the stocks that faced heavy losses in yesterday's trading session.

Quite often, investors are lured into buying the so-called 'momentum' stocks by their brokers or tipsters. Mostly, the rationale is nothing but the heavy trading interest on the futures & options (F&O) counter of these stocks. But yesterday's stock crash is a lesson to be remembered. We strongly believe that investors must avoid any impulses to get drawn into such dubious schemes. In such cases, the high risk is not going to convert into a high return. Forget return, it may even erode your capital. It is best to keep away from such recipes of losing hard-earned money.

Data source: Business Standard