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Markets: What's the buzzword? - Views on News from Equitymaster
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  • Jul 20, 2005

    Markets: What's the buzzword?

    The Indian stock markets are in the grip of a strong bull run. This is evident from the fact that the indices have been making new highs almost every day now and stocks, big and small, have been flying around, making and breaking records along the way as they move into the so called 'uncharted' territories. As the Sensex seems determined to test the 'next' highs, there are already whispers floating in the market about the magic 8,000 levels not being far away. 'Bulk deals', 'record volumes', 'exponential bottomline growth' and 'turnaround story' have become the buzzwords in the market. The theory of investing has unfortunately moved away from 'fundamentals' and 'rationality' to the newly found USPs (unique selling propositions) mentioned above. But, one needs to ponder, are these really the 'true' reasons that one should consider while investing?

    Before we go onto throw some light on the buzzwords, which re-surface every time the markets are witnessing a bull run, let us take a look at the kind of 'unsustainable' euphoria that has already built up and is being witnessed currently on the bourses. Below provided are some links to pages, which show the top gainers across various periods on the BSE-Sensex with most of these stocks belonging to the B2 and the groups below that.

    BSE gainers: Over the week, Over the month, Over the year (this is scary!)

    Now let us consider some of the buzzwords in a little detail.

    Bulk deals:  This is the term used to describe the event when a substantial amount of equity of a company changes hands on the bourses i.e. one party buys a significant chunk of the free floating stock available in the market from another party. The amount of equity (in nos.) could be anything as far as it is significant number of shares that are traded (generally higher) as compared to the historical average. However, while we do not question the credibility of all the bulk deals that place on the exchanges, a quick glance through leading newspapers would indicate a strange pattern. This is of the 'buyer' and the 'seller' being the same/related party/investor and you don't need much IQ to come to the conclusion that the two of them are linked. This basically implies mere 'changing of pockets in the same shirt' and investors need to be really careful of such developments, as they artificially inflate the trading volumes.

    Record volumes:  While one of the reasons for exorbitantly high trading volumes is the act of bulk deals, investors must note that there is no shortage of traders/punters in the market who merely take advantage of the euphoria being built around a stock. These 'opportunists' consistently get in and out of the stock in the most irresponsible manner and have no real intentions of actually taking delivery of the stock. And this is precisely because they themselves do not know what will be the future of the stock when the markets re-open for trading the following day. Thus, these volumes are basically just froth and have no real connection to the actual fundamentals of the company.

    Delivery ratio:  A seemingly decent parameter to track whether there is actually some serious buying taking place in a particular stock is the delivery ratio of the stock. One shouldn't be surprised to know that the recent darlings of the bourses i.e. ITI, SRF, Titan, VSNL and Aptech have consistently been registering very low delivery statistics (in the region of 2% to 20%). While the counter argument here could be that since the traded volumes in these stocks are now significantly higher and the actually deliveries would tend to be lower, we would advise investors to remain cautious of the additional 'froth' (non-delivery based volumes) that is present in these stocks.

    However, we must mention here that while most stocks, which are traded in the futures and options (F&O) market, would tend to have lower volumes for various reasons, we would advise investors to, nonetheless, remain cautious. Further, it must be noted that since the 'T' (trade-to-trade) group of stocks are compulsorily marked for delivery, this should not be implied as these are fundamentally sound companies since the delivery is 100%. Rather one should wonder why were these stocks placed in the trade-to-trade category in the first place? And the reasons could be many - no timely filing of quarterly results, to curb speculative activity in these stocks, non-compliance of various stock exchange rules and regulations, and the list goes on!

    To conclude, while this article was not aimed at sounding negative on the markets, it was merely an attempt to bring to the forefront the various terminologies/techniques used by market makers to generate higher profits (largely at the expense of the retail investor) and by brokers to convince their clients and generate some additional brokerage. By the way, have you checked your broker's profit and loss account (if they are listed) and compared it to your percentage gains?



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