The Stock Market Heyday: A Speculators Bonanza!

Kingsuk Datta

IN recent times, an incessant tom-tom has been carried on to induce deep-seated belief that buoyancy in the share market of the country works as a panacea for the ongoing economic doldrums. True, in a society where private capital plays the dominant role, the stock exchanges are supposed to be of great significance. Basically, joint stock companies, in order to raise funds from the public through the issue of equity shares for the new industries, and subsequent expansion from the primary equity market, require to get their shares listed with the stock exchanges. This enables shares to be transferred freely through purchase and sale in the stock exchanges, i.e. in the secondary market. Thus, the purpose of share markets is to facilitate the free movement of finance for development on a capitalist path. However, this notion has been very largely vanished now a days, since the rise of the regime where finance capital, with its innate speculative character, is pushing back industrial capital in order to take control of the global economy. Even today’s textbooks on investment have recognised the dominant presence of speculation in share trading.

The performance of the country in the preceding decade vis-à-vis the mood of stock exchanges completely negates the said notion of ‘panacea’. As per the official statistics despite of gloomy performance of equities in the decade of 1991-2001, the nominal GDP of the country increased by about 3.7 times, foreign exchange reserves soared from near zero level to a record $48 billion, exports multiplied by 2.4 times. According to investment pundits the excessive volatility of the Indian stock market and periodic scams during this same period are the major deterrent in keeping long-term investors away from the stock market.

J M Keynes, one of the most influential economists of the twentieth century, believed that excessive “financial circulation” on account of undue speculation could lead to a distortion of the economy, and therefore a fair balance between industrial and financial circulation should be maintained. But the advocates of laissez-faire, citing the vague excuse of administrative impracticability and arguing for personal freedom and “price discovery”, always opposed the regulatory mechanism so as to allow unrestricted speculation in the share market, accepting speculation as a “necessary evil”. Not surprisingly, they turn to the president and chairman emeritus, Chicago Mercantile Exchange Leo Melamed, to buttress their argument in favour of speculation in the financial market. “Finally, one cannot speak about efficiency of markets without mentioning the role of the speculator.” And again roping in Adam Smith out of context: “Just as Adam Smith suggested a long time ago, by performing his speculative function, the speculator serves the overall economy.”

SPECULATOR VS INVESTOR

Even while the investment experts fail to clearly distinguish between an investor and a speculator, they have briefly noted the distinction with regard to the behavioural pattern of the two in the following terms.

• While an investor has a relatively longer planning horizon, i.e. a period of holding shares for at least one year, a speculator holds shares for a very short period usually for a few days.

• A speculator who resorts to borrowed fund to supplement his personal resources, is keen to assume a high risk for a high rate of return compared to a true investor, who by and large seeks a modest return on his own funds.

• To an investor, the fundamental factors and prospects of the companies are of great significance, while the speculator very much depends on hearsay, market psychology and the mere market index. The typical investor attaches importance to the intrinsic value of a security, which can be attributed to the fundamental factors of the performance and strength of the company, industry and the economy. By contrast, the psychological approach resorted to by the speculator, is divorced from reason and based entirely on emotion, greed and euphoria.

Thus when speculation is being licensed to have dominance over the capital market, how can the buoyancy of stock exchanges serve the national economy?

SHARE INDICES: HOW FAR THEY MANIFEST THE REALITY?

In this revelry of the helmsmen of the economy over the booming of the share market, as reflected in the share market indices, the common man remains nonplussed. In reality, the Bombay Stock Exchange Sensitivity Index, popular known as the Sensex, reflects the value-weighted index for any trading day, on the basis of the movement of 30 sensitive shares with 1978-79 as the base year. Again the Nifty, a value-weighted index, represents the price of shares of just 50 listed companies traded in the National Stock Exchange, with November 3, 1995, as its base at 100.

In an era of finance capital domination, the sanctity of the share market indexes based on 30 or 50 odd companies, with the intrinsic limitation of statistical sampling is, to say the least, deplorable.

The Sensex reached an all time high of 8821.84 on October 5, 2005, from the lowest level of 2846.80 as on October 29, 2002, thus registering a growth of 210 per cent within the last three years. The Nifty also showed a growth of 190 per cent from 920 on April 28, 2003 to 2669.20 on October 5, 2005. The indicators of the country’s economic performance vis-à-vis the accentuated crises we have been experiencing every day are sufficient enough to ridicule the buoyancy of the share market.

Again to quote the head of a renowned share market research group on the very recent volatility of share market: “Just as the speed of the rise of the markets wasn’t comprehensible, the reason for the speed with which it has fallen is also unclear.” Thanks to the speculators and Foreign Institutional Investors (FIIs), the darling of the neo-liberals! And the leading financial daily The Economic Times lamented of October 29, 2005 in its edition front-page headline on the Sensex slide, the Sensex being a victim of FII apathy in offloading a hefty Rs 755 crore in a single day –– the highest ever in recent months!

MOBILISATION OF MUTUAL FUNDS

With the opening up of mutual funds for the private sector in 1992, a large number of private funds with multinational tie-up, have been set up to allure the common people to pour their hard-earned money into speculative share markets. Egged on by the propaganda of the ‘expertise’ of the mutual funds, the people, having meagre resource and lacking the required slyness to win in the gamble on the share market, are advised to join in schemes of the funds to test the bonanza.

The role of mutual funds in pulling up and down the stock market, the dismal performance of some mutual funds, and restrictions on these funds imposed by the Security Exchange Board of India, (SEBI) speak of the aggressive speculative character of the mutual funds.

The hollowness of the claim of expertise of mutual funds of the country is vividly expressed by a Bombay stockbroker. “We are still groping around, trying to get a clearer idea about how we should get going.” So, the highly paid equity researchers are still fumbling and suffering from superficial analysis, emphasis on numbers and ratios, short-term orientation and perennial inadequacy of specialisation, for meaningful depth with extensive coverage.

A closer look at the economic trends in our country, a comparison of the clamour of the neo-liberal camp, with the experience of vast majority in the country, should be enlightenment enough how the stock markets in a capitalist designed globalisation, serves finance capital, regardless of the real need of development for all.