Why is the stock market down?
[14th May, 2022]
So the Sensex and Nifty are falling. 𝗕𝘂𝘁 𝘄𝗵𝘆 𝗶𝘀 𝘁𝗵𝗶𝘀 𝗵𝗮𝗽𝗽𝗲𝗻𝗶𝗻𝗴?
First, we need to understand the fundamentals of how the stock market works.
Here’s 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. We’ll refer to Institutional Investors as II (aye aye) from now, so that I don’t need to type a lot 😋
Now, here’s 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 doesn’t 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, there’s more demand, so the prices go up. If more IIs want to sell shares, there’s 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 𝘄𝗵𝘆 𝗱𝗼 𝘁𝗵𝗲𝘆 𝗵𝗮𝘃𝗲 𝗹𝗲𝘀𝘀𝗲𝗿 𝗰𝗼𝗻𝗳𝗶𝗱𝗲𝗻𝗰𝗲?
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 India’s 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.
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