The Stock Market Bubble is About to Burst (in India)
Stock prices are skyrocketing in India irrespective of the current market condition. Is this really a good time to be in the market?
Lockdown comparison
In the previous lockdown (start of 2020 march), stock prices all over the world start to dip to the all-time lowest. This is not particular to one country, but the entire world faced this situation as investments were not subjected to that particular nation alone.
People were afraid about losing all the values of their holdings (as they were new to a pandemic situation). Also, to liquidize the money in hand, that seems to be the only reasonable idea for many, as none were aware of the after effects of the pandemic.
So, values dead dropped. Markets have seen the lowest ever possible and panic over the pandemic was the main the reason for all of it.
But the new lockdown (rather 2nd wave’s effects) have minimized the fear in people and are abrupt even in the eyes (looking at people roaming around irrespective of the lockdown restrictions). This is due to their experience in passing over the 1st phase as well.
This exact behavior is being reflected in investing as well. As they have seen “how everyone managed to get out of a panic situation and sustain its business”, there’s a ray of hope in everyone that the shares they had bought will not go in vain. So, withdrawing the holdings seems highly irrational and everyone started pouring their money in shares/stocks.
This made the inflation to go further higher as the demand keeps increasing to the limited supply of stocks in the market, and that’s why stocks are skyrocketing irrespective of how they function now.
The unexpected beauty is for those who still hold on to their stocks in the previous year, because those stocks gained a whooping value over 50–70%. On average, every stock gained up to 30% in common. This has also been the reason for every speculator in the country to go for stocks without understanding how it works.
How a share price works?
Initially, to get listed in the index of a country, a company has to follow rather hold several qualities (establishing the company’s profile stronger).
After that, the base price of the company’s share is determined through a mathematical formula.
Index value = Current market value / (Base Market Capital * Base Index Value)
As the company is new, there will not be a greater urge in people to buy its stocks unless they know the purpose of the company and its future in the market and its possible returns.
So, no company ever receives a greater value (unless it depreciated from its initial value through loss), and the initial value will start to fluctuate based on the demand from the people to buy it.
As the investments are subjected to cross borders, there will always be a demand for its shares (if the company is into the right products for the future). In countries like India, where over population is a thing, the speculators would mostly be within (as understanding the concept is a time-consuming one).
The problem with the inflation
As the inflation is uncontrollable in a global market, it is always expected to be present despite the country and its foundation/growth. But the problem here (in stocks/shares) is the yield that the investor expects for their contribution.
Every company determines its yield (profit) to the investors as dividends and returns. Every year (or 6 months), this has to be assured to the investors. In fact, most of the speculators would put their money in a company based only on the return they are obtaining over time.
Normally, if a company is performing good (say Apple), they would make use of the capital they receive it to grow further and meet the customers demand to produce good profits, which in turn profits the investor.
But if the company is performing bad, then it cannot meet the profit it aims, which would reflect in the investors return, resulting in losing the share’s value.
If people have been putting their money in a poor performing company, then the share price would become like a bubble; after sometimes, reaching its limits, it would suddenly burst to reach the lowest of its value.
The bubble that’s about to burst
People are right now into blowing the bubble (especially in India).
As the lockdown restrictions have made all the industries to halt, there have not been enough products in the market. Even the ones in the market are moving slow. So, the possibility of giving a good return for the initial price given is highly questionable.
Despite that fact, share prices are sky-rocketing now. It must definitely produce return, but that’s highly impossible for the current fiscal quarter. Even if it sustains the current quarter, the entire year’s result will highly get affected.
So, on the whole, this bubble is waiting to get burst in anytime soon. In this time, it is highly advisable for anyone to hold their investment plans for now; If you would still like to invest, at least, wait for the time the market reaches are bearable inflation (Sensex around 35000 points, and Nifty around 11500 points). Those who have their hold in the market are highly advised to take it out if you are in your profit curve.
The later you make it, the more your loss will be.
