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25
Oct
2010
Stock Market: The War among fears objectives & greed

The voice can be hell loud, the buzz can be more teasing and the cry can be more painful but the reality is that stock markets are the places where risk is traded. If you are willing to buy a lottery ticket or fix income certificate so it is not the place. Here the offer is the equity stake in companies that do business and they carry different types of business risks. The business risks are well plugged in with the market risk of equity exchange anyways. So if you are interested to buy a stock then it is better to craft a psychology that helps you to behave like owners & risk takers.

I just saw some results from Karachi Stock Exchange [KSE]. Business Recorder reported that the interest of foreign investors is continued in KSE that has caused inflow of $ 34.586 million in first sixteen sessions of October 2010. This is more than September’s total inflow of $22.352 million. In addition it is very interesting that the inflow of $ 2.8 million is reported during the week ending October 22 2010.

PERCEPTION IS NOT ALWAYS A REALITY:

Generally people think about the adverse effects of law and order situation, political crises and negative image of the country over the rise and fall of equity stocks. End of the day it is not the statement in total sense of stock market science or better I can say stock market psychology. Currently foreign investors have picked specific sectors with their relevant risk calculations and they are even willing to take position in the time of high volatility in the country and market.

It is very easy for conventional economists and political economics scholars to say that you can not mobilize the investment in the country’s equity markets where political instability & law and order chaos is prevailing but a real equity market analyst can not accept this fact as a wholesome reality. Everything that we gets in disordered on political and country’s management front adds risk. It even sometimes increases current level of risks. The point that can attract investors to invest in this critical time is the return available to compensate this marginal or incremental risk.

People can invest in Iraq or Afghanistan by chasing high return over risk ratio so why not Pakistan? It is all about communicating the essence of investments & the importance of risks. Karachi Stock Market that is working with 600 plus companies and 100 companies that represents 86% of total market capitalization is even interesting. The country’s consumer and demand base is far larger before this size of market. In my personal view even 1600 companies in KSE is can not be termed as larger.

Generally rational investors invest by setting their confidence intervals over market and scenarios. Sometimes they have embedded rational and sometimes investment analyst or manager has to craft it. Media, common man or household can say whatever regarding stock market volatility but the matter of the fact is that this volatility makes the market attractive.

DAY TRADERS & SPECULATORS RUN THE MARKET

People generally perceive that it is better for stock market that investors take long term position in stocks but the reality is that the day traders and speculators run the market’s daily trade affairs. If we shall have more long and loyal positions in the market then the index shall not move. It means that the market shall go towards chaos. Yes it is the responsibility of the trading regulators to chalk out the risk management framework that facilitates investors and provide them a platform that allows them to multiply their returns on the cost of premium for risk management. This actually runs the market of Risk Management Products that I always define as byproduct of Market Trading Momentum over risk.

In fact we need a balance of investors in the equity market. Some of them need to invest for long run and some of them need to invest as a day traders. This is how the market function runs. Nothing is bad, nothing is good; it is all business and her scenarios that counts. It is all about how well you are trained to sell the equity in secondary markets and how rational is the buyer to take position in it.

INVESTOR’S PSYCHOLOGY IS THE REAL THING TO MANAGE

Actually market runs by the psychology of the investors of different backgrounds. The opportunities and the market structure are the same for all investors. It is the financial / investment intelligence and financial capability of investors that derives market in different dimensions. If we try to understand the psychology of investors and their personality instincts so we can better create a firm market place that can even work in the time that are considered as worst among layman’s terminologies.

Even when interest rate are cheap across the world and Pakistan is working on the policy rate of 13.5% it make a lot of sense for international investors to raise cheaper finance from their markets and put it in small equity markets like Karachi Stock Exchange. It is the exchange the has been offering handy returns. When we sees KSE making $ 900 plus on average in 2009 over the investment of $100 on Dec 31 1999 then international investors grade KSE as one the briskest markets in the world. In phases stock market goes down and in phases it goes up, this abnormality is absolutely normal. The investors with the rational of holding period always win. The crying babies can say whatever but the market is like that and it is same across the globe.

YOU ARE BUYING A COMPANY NOT A CERTIFICATE

There is another big problem when people invest in stock like a certificate. They never try to know the position and performance of the company in which they are investing in. The first index of value is the corporate value of stock. The majority of the people see stock market in isolation of corporate value of stocks. This makes a sound difference in rational & irrational buying decision based on fundamental analysis. Even sometimes the rational of buying stock based on technical analysis is really good but this comes with the risks levels that each investor has to know so he/she can not cry in case of loss [market oriented]. Even a loss can be recovered if the knowledge of trading offsets and swap of transactions are there.

Whoever wants to invest in stock market has an objective of making quick profits, even they are greedy but they have some fears. These three elements are the key determinant of market positions. The market is equipped with all the capacities that can trigger any of these with different dynamics of market running variables.

We are willing to enhance risk management framework in the market. We want investors to be protected through regulations but end of the day we can not touch the level of risk management & protection that would remove the risky nature of equity markets. This actually can be the blow on expected return that can derive all investments toward fix income securities. When interest rates are moving up the stock market also adjust their return levels accordingly but this can not be rationalize if we expect the risk being removed completely from the market and returns stays at top.

A VERY PERSONAL ADVICE

This game need some class knowledge, skills & heart so don’t try this at home and check your local listening. Better know yourself because the market shall stay uncertain.

Happy investment folks – Stock always rocks even when they go down in price & market become depressed, it is all about knowing the right striking time and the high time to go out……


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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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