Why is the stock market down?
[14th May, 2022]
So the Sensex and Nifty are falling. ๐๐๐ ๐๐ต๐ ๐ถ๐ ๐๐ต๐ถ๐ ๐ต๐ฎ๐ฝ๐ฝ๐ฒ๐ป๐ถ๐ป๐ด?
๐๐ฒ๐โ๐ ๐๐ฒ๐ฒ..
First, we need to understand the fundamentals of how the stock market works.
Hereโs an important fact - People like you and I, are retail investors. Then, there are HNI (High Networth Individuals) investors and then there are Institutional Investors. HNIs are basically the rich folks who invest more money than retail investors, and Institutional Investors are companies like Mutual Funds, Banks, Hedge Funds etc, who invest in the stock market. Weโll refer to Institutional Investors as II (aye aye) from now, so that I donโt need to type a lot ๐
Now, hereโs another interesting fact - Retail investors like you and me contribute only about 8-9% of the total volume of the stock market. The majority of shares are held by promoters of the relevant companies and Institutional Investors. So when you and I buy or sell a share, it doesnโt really move the market. The market moves when these other investors buy or sell shares. If there are more IIs who want to buy shares, thereโs more demand, so the prices go up. If more IIs want to sell shares, thereโs lesser demand, so share price goes down.
Now if the market is falling, it means that there are more IIs wanting to sell shares. But why?
One reason could be that these investors have lesser confidence in the economy, which is to a large extent, driven by the companies listed on the stock exchange.
But ๐๐ต๐ ๐ฑ๐ผ ๐๐ต๐ฒ๐ ๐ต๐ฎ๐๐ฒ ๐น๐ฒ๐๐๐ฒ๐ฟ ๐ฐ๐ผ๐ป๐ณ๐ถ๐ฑ๐ฒ๐ป๐ฐ๐ฒ?
Here are 3 probable reasons:
1. We know that since the repo rate was hiked, bonds will now offer more coupon (interest) to investors. So IIs could get a little more swayed to invest in bonds rather than stocks
2. Crude oil prices are alarmingly high. Now since crude oil is an input component in most industries, costs for these industries will be higher. Thus profits will be reduced, making it less lucrative to invest in these stocks
3. Rising Inflation: With costs of everything rising, again, profits for companies will reduce. Therefore, it could be less lucrative to invest in certain companies whose profits are being eaten up
Now because of all of this, a lot of IIs could be selling shares of companies in the Indian stock market, which means there is more supply and lesser demand for shares of Indian companies, which means the stock prices will fall.
Not just this, even globally, stock markets are down due to the unpredictability, geopolitical tensions, China lock-down and other factors. All of that too, has impact on Indiaโs stock market.
Please note that this is an extremely simplified explanation for the stock market falling. In reality, there are a lot of factors at play, but this gives a brief idea of how economics at a larger level impacts the market.
Subscribe to our newsletter if youโre not reading this on email. We send out one email every week, simplifying finance related concepts.