Are Stock Market Speculative

ARE STOCK MARKETS SPECULATIVE

What is speculation Speculation typically involves the lending of money or the purchase of assets, equity or debt but in a manner that has not been given through analysis or is deemed to have low margin of safety or a significant risk of the loss of the principal investments. In a financial context, the terms "speculation" and "investment" are actually quite specific.

How speculation is done.. 1.Option Dealing for hedging Options are used for hedging purpose to limit the loss in portfolio. Thus hedging is a device which protects against losses due to price fluctuation. 2. Wash Sales It is a device by which a speculator is able to reap huge profits by creating misleading pictures in the market. Actually it’s a fictitious transaction in which member sells huge quantity and buy the same from other brokers. 3. Cornering It refers to the process of holding the entire supply of a particular security by an individual or a group of individuals with a view to dictate the short-seller and earn profits by catching short seller.

Contd. 4. Rigging the market It refers to the process of creating an artificial condition in the market, whereby, the market value of a particular security is pushed up. It is due to strong Bull Run created by such members. They initially buy the securities in bulk at higher prices which shows picture like that the security is in Bull Run. 5. Blank Transfer It facilitates speculative activities through carry-over or Badla transaction. When the transferor (Seller) simply signs the transfer form without specifying the name of the transferee (Buyer) is called blank transfer.

What Speculator does? qSpeculators are out to make money, to buy low and sell high. qThey are the individuals looking at the fundamental values of items, buying when prices are too low and helping lift these prices, and selling when prices are too high and helping to lower these prices. qSpeculators buy, sell, and short-sell stocks solely for their own gain. qThey perform an important role in the marketplace. That role is to provide liquidity

Type of Speculators The most common type of speculators are:qMOMENTUM PLAYER:-Who likes to throw his money after stocks that have already gone up very far. His motto is buy high and sell higher. qContrarian player:- Who is almost the polar opposite of a momentum chaser, purchasing shares of companies that are down and out of favor. He will seek to short-sell stocks he considers overbought and overvalued

The Basic Images of Stock Market Casino – There is no place for rationally based

speculations , all is a matter of Luck Then wrong firms may expand just because their share prices are high.

Theory of Efficient Markets – Is the stock market which is a sensitive processor

of information, quickly responding to new information to adjust share price correctly Every new information leads to the adjustment of share prices

High average return and low betas

Easier to expand by issuing new shares

Low average return and high betas

Tend to contract and collapse

What the efficient market says? 1.There is no way of beating the market to earn an aboveaverage return on share of a given risk class 2. All relevant information is immediately included in the share price

Pure chance New information used first

Speculative Bubbles

Speculative Bubbles The price depends on the anticipated future price , whereas the future price also depends on the it’s future price ……

In such market there is no way for the fundamentals, the economic calculation about future dividend or interest payment to influence the price. It all depends on what people today think about people of tomorrow and their expectations

So maybe the stock market is more like a casino?

Undoubtedly, financial markets do sometimes exhibit temporary bubbles However we can notice presence of short-term speculators who buy not in anticipation of future dividends but purely to resell

Although there are no symmetry in stock market, market prices are more compatible with the efficient market theory than the pure casino

Participants of speculation Institutional investors Promoters of the companies High net-worth individuals

Examples of speculation on Indian stock market Harshat mehta scam in 90’s Ketan parekh scam in 99-2000.

GOVT. INICIATIVE TO CONTROL SPECULATION

The govt. of India has set up an organization known as Securities Exchange Board Of India (SEBI) to look after all these matter and control the all these kinds of activities in the capital market.

Is speculation really a bad thing?

When profitable investment projects are

scarce, bubbles on the stock market may provide additional investment opportunities with the potential to increase aggregate profits and to improve economic welfare. However, this potentially positive effect can only occur if bubbles are sustainable and do not burst.

Thank you Presented byBikash Mirza Balu Subhadip Sandeep