Have you fallen prey to stock price rigging? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Have you fallen prey to stock price rigging? 

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In this issue:
» Is the telecom sector in the grips of a slowdown?
» Power prices trebled in 18 days!
» These tech giants find India still attractive
» SBI's bond issue success brightens up prospects for others
» ...and more!

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00:00  Chart of the day
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.

Data source: Business Standard

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.

Have you ever lost money on the so-called operator-driven stocks? Share your comments with us or post your views on Facebook page / Google+ page.

The woes for India's telecom sector don't appear to be easing off. First it was hyper competition that led to one of the most severe price wars in the sector. If that wasn't enough, there were regulators constantly figuring out how to milk the telecom companies with higher license fees, spectrum charges, etc. But all the time there was one thing that kept the companies going and made the sector attractive. And that was volumes in the form of subscriber additions. However, now even this ray of light seems to be diminishing. The month of June 2012, saw subscriber net additions slowing down. For most of the larger companies the numbers remained flat while the newer guys saw negative numbers. There are two ways of looking at this figure. One is to take this as an indication of overall slowdown in the sector. Considering that India is nearing the 80% telecom penetration mark it is but obvious that there would be a slowdown in net adds. However, there is another point of view which in our opinion is more valid. June is in any case a seasonally weak month and this could be a temporary slowdown. It would be better to view the data in the coming months before declaring that the sector would see a permanent slowdown in volumes.

Commodity prices have certainly solicited interest from investors and consumers alike. The shift in economic balance between the developing and developed world has changed their pricing dynamics. In the bargain they have offered interesting opportunities to the likes of Jim Rogers. But there is one commodity whose price movements have skipped even the prying eyes of the legendry commodity guru. Possibly because the movements are peculiar to India. And even otherwise the commodity has never attracted too many investors. What we are referring to is neither an industrial metal nor a precious one. Nevertheless, its demand supply gap in India is increasingly widening. Any guesses? Well, it is none other than electricity! While coal supply woes have thwarted the fortunes of thermal power, Indians were hoping for some relief from hydro power. However, with the rainfall being quite deficient so far, even hydro power generation in northern India has been badly hit. So much so that power prices at Indian Energy Exchanges have trebled in the past 18 days! Now that is probably an ascent even gold cannot beat. Having said that, power prices are now assumed to have peaked. And going forward, consumers can hope for lower power costs.

There have been talks for quite some time now that the IT sector is down in the dumps what with the slowdown in the US and Europe and fears of a ban in outsourcing. The latest relatively subdued results of Infosys has not helped matters either. But not all is bleak. Some of the world's biggest tech companies still look upon India as an attractive investment destination. These companies are looking at India from a long term horizon and still believe that the country holds potential. And this is amply evident in the increase in office space leased in the cities of Bangalore and Hyderabad. The Economic Times has pointed out that companies such as Facebook, Amazon, Xerox and chip maker AMD are looking to invest in India. A slowdown is the best time to attract property and talent at comparatively lower prices especially if the long term growth prospects look intact. Hence, to write off the IT sector in India based on near term concerns may not be the right approach we believe.

Trying to reduce their cost of funds either through increasing their low cost deposit base or accessing cheap resources is becoming important for banks these days. They are trying to protect spreads and margins at all costs, especially in the current rate scenario. Raising cheap money from abroad seems to be a no-brainer. However global sentiments are weak and the credit rating of India and its banks have been downgraded. But, India's largest bank State Bank of India (SBI) seems to have finally broken ground. The bank raised US$ 1.25 bn from overseas investors at 4.125% for a five year period. These dollar bonds were subscribed 5.4 times. The bonds received US$ 6.8 bn in bids from around 350 accounts spread across Asian, European and US investors. The success of this offer has now opened a window of opportunity to other good-quality Indian issuers to tap international bond markets. A number of banks have been waiting on the sidelines since April on account of risk aversion from overseas investors. Maybe we can expect to see a few more bond issues soon.

Picture this - you, along with your family visit a newly opened mall. It's one of the biggest, swankiest malls in India. So the experience is something you look forward to. But when you walk in, it seems like a ghost town with few people walking around. Also, a good proportion of the shops are vacant. As per an article published in the Business Standard, this seems to be the situation at the biggest shopping mall in Mumbai.

When times are good, people - in this case, consumers and developers - spend money; with the former on needs & desires and the latter on building more malls. But such a situation seems to have developed overtime, wherein it could take years before the overcapacity built up in the retail sector gets absorbed. The situation is further aggravated given that consumer spending has slowed down substantially. If Euromonitor International is to be believed, consumer spending is likely to grow by just 5.7% this year as compared to 24% in 2010.

While this is just a perspective on the commercial property (retail to be specific) sector in India, we cannot help but wonder how the change in consumer spending would impact other industries especially those that are dependent on domestic consumption cycles.

Meanwhile, Indian equity markets have been trading strong. The BSE-Sensex was trading higher by around 280 points at the time of writing. All sectoral indices were trading in the green led by metal and banking stocks. The Asian markets closed in the green today. Europe has opened on a positive note on hopes of fresh stimulus.

04:50  Today's investing mantra
"The NYSE is one big supermarket of companies. And you are going to be buying stocks, what you want to have happen? You want to have those stocks go down, way down; you will make better buys then." -Warren Buffett

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    1 Responses to "Have you fallen prey to stock price rigging?"


    Jul 27, 2012

    Arkimin was included 5 years Back in F&O by NSE to improve it's Share Price,eventhough it is Low Volume Real Estate Stock.Thenon It's Price from 200 to 2000,daily peaking at Upper Curcuit of 20% with Low Volume.With Hue & Cry by Media and Analyst,SEBI took up Investigation on It's Share Price.Immediately NSE/BSE excluded it from F&O same Day,Which is Incorrect.Next Day It is Falling Heavily.Its Fall from 2000 to 200 is Imminent,My Broker Phoned me to see how it is Falling.When Earlier,I asked him Buy 1 Lot in Futures Contract,he Refused stating that It's Margin is Two&Half Lakhs and My Account Money is not so much.Why Exchages/SEBI Slept till its Margin Money has gone up so High. I told My Broker that with its Exclusion from F&O It will fall to its original Price of 200.Eventhough My Money is not Sufficient for Margin,He Shorted it and put Buy order with 20 Down.Both Transacted within a minute.When he Phoned me ,I told him to short again,which got transacted as Short Covering by DayTraders Started and Price moves up.By then his H.O. Phoned him that its Margin is Rs.7 Lakhs then and My Money in my Account does not Permit transacting it.when he Phoned him,I asked him to Cover my Position.He tried but Could not transact it till Price went up by 200 and my account Money is Wiped out. When he Phoned me,I asked him to Short it again ,But he did not oblige stating that its Margin is 7 Lakhs.Thus My Account is Wiped out,eventhough I know Correctly that its Share Price would Fall to 200,which actually happened.Lesson is: SEBI should Stipulate Maximum amount upon which LOT Quatity is to be Reduced.SEBI should declare Lot Value is to be Within 1 to 3 Lakhs,so that Common Traders do not get Wiped out.

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