September 24, 2010 11:37 pm
I want to know what the reason on such bull run?
this bull run is due to FII investment
retail invester involvement is less.till today people remember last crash of market.
which restrict them to participate throughly.
A stock is valued not just based on current earnings and profit but also on what people think of their growth potential. potential high growth company stocks have a higher price for every Re. of profit they make compared to a company with steadier returns. SO even if a company shows year on year profit increase its price may go down because it could already have been priced higher with expectation of higher earning. Stock market is a leading indicator (people trade based on what they expect to happen). This was the cause of the high-tech stock market bubble in 2001 in the US where a lot of dotcoms and internet company stocks were highly priced because of their ‘potential’ growth which never materialized.
Its been my long standing question.While most companies post year on year return in profit almost all the year,why would market go down?? why is stock market different from company performances or am i getting it totally wrong?
one fundamental problem with our Index (Sensex or Nifty) is that they are made of companies based on Market capitalization and not profitability) , So if it contains companies which are big but are not great , index will move as per their movement, however there are other thousands of stocks which are better and make good movement , but their movement has little or no corelation with Index
I will give you 1 vote for asking a great question 🙂
Well………..let me attempt to answer why such a bull run.
Let us look at very basic level what actually money and investing means. Money is nothing but purchasing power to buy goods & services whereas currency is a mediun of exchnage which basically translates this purchasing power in tengible form. When a salaried person provides services, he gets money in return of services he provides. This money represents his purchasing power which he uses to buy his needs. Whatever money he saves is essentially the purchasing power he retains for his future use. This future purchasing power gets translated in the form of currency in his bank account or currency notes in his hand. However, this purchasing power gets reduced over a period of time due to inflation. Act of investing this money is nothing else but the attempt to preserve this purchasing power against inflation. One can preserve purchasing power by getting returns at least in line with inflation.
Now, let us look at act of investing. The first choice for investment is to look at safest option, that is bank deposits. If interest we get from bank deposit is such that after tax returns in our hand are at least equal to inflation, then we need to look no further and straight away invest all our money in bank FD as that would satisfy our basic need of preserving our current purchasing power. If after-tax interest from bank FD is less than inflation, we need to look at other avenues, which involves risks, in order to retain our purchasing power over long term period.
This is primary reason for bull run in equities. Interest rates world wide are very low. Add income tax and you realise that actual return you get in hand from bank FD is very much less than inflation. This ensures that people shift money to riskier options like equities to get adequate returns. Now, returns from equities are dependent on valuations as well as earning growth of companies. Here it gets tricky.
If you look at western countries, the interst rates they get from safe options like bank FD and Government bonds are almost negligible. This forces them to look for riskier options. They get attracted to emerging markets like India because of high growth rates. Intitally valuations are not problem. Therefore, investing in emerging market equities looks sure shot bet. This starts bull run and attracts more and more attention. This then acts like a snowball effect. More mony comes in, stock mraket keeps going higher which attracts even more money. At some point, valuations get stretched but, by now, entire focus remains on growth rates, strong past performance and “story”. Valuations are pushed in background. At this stage, markets get driven higher by speculation instead of its original basis of investing for preservation of purchasing power. This results in bubble.
During this entire period, central bank does not remain idle. It starts jacking up interests in order to contain speculation. At some point, interest rates become high enough to satisfy original requirement of providing adequate after-tax returns to preserve purchasing power. At this point, smart money starts pulling money out of equities and back to fixed income instruments. More this happens and, at some point, bubble bursts and equity valuations come back down to earth. Then, cycle repeats all over again.
Currently, our equity markets are over valued. However, interest rates on bank FD are not adequate. Moreover, valuations are less than bubble like valuations we expereinced earlier in 1992, 2000 & 2008. Hence, there is still room to go. Keep watching!!
its due To FII investment
I can’t comment on fundamental reasons of sensex or individual stocks. But yes, technically Sensex chart is very strong. Although, we may come to 19000 levels in next few days. Check out more on
Hope it will you.
According to my knowledge it is the FII and HNI’s pumping in money. Our stocks look the cheapest and they would want to make good money. Also they know that people are still apprehensive of entering the market but once there is a buzz in the Indian Market a lot of people would start to re- enter the markets at such high levels.
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