Stock Markets have come a long way in a very short time. We have got so used to this bullish nature that If I say SENSEX is going to touch 25k by next December, people will call me a fool. They expect that to happen before next June 🙂
I think these few years are going to bring paradigm shift in the investment mentality of the Common man. I am not an expert in economics and finance but with little that I know I think the coming few years are going to be very interesting.
Over years our parents relied heavily on POST and LIC and SBI fixed deposits. They were beyond any doubt secure and gave good 9-10% interest. I have grown up listening to my parents saying POST is the best. the television serials showed many times how good families turned destitute by investing in shares. Share Markets were no different that race course.
If you pick up any random Mutual Fund in market it gives around 13 to 20% of rate or return. Figures are many times deceiving and same is the case with even MFs but there is no doubt that they give much higher returns than bank FD or postal insurance. Lets not talk about figures and terminologies lets see the basics.
Every year the price of rupee reduces for that matter of any currency. Its called depreciation of rupee. This causes inflation of inflation cause this. But it happens. The inflation rate measures how fast the value of rupee is reducing. A 2.5% inflation rate is normal and something near 5% is serious. If its above 8% you better change the country soon. How the government controls this rate is beyond the scope of our discussion.
In india the inflation rate is around 3-4% lets say 5%. So if you keep Rs 100 hidden under your bed after 20 years they will be worth one ruppee. That is why one should invest money to protect himself from getting into this kind of situation. Indians used Golden coin in ancient time hence this issue was never faced. If you invest in a scheme that gives you 9% returns you are actually earning 95 = 4% of money. And you are earning it for no reason. You dont work for that money. This increases you liquidity, meaning it increases your income and encourages you to spend this 4% of money for you luxury. This then adds to inflation. So ideally all over the world the trend followed is that rate of interests in banks, PPF should be equal to the inflation rate. That explains why economists always want to reduce the interest rate though increasing it can gain them more votes. Increasing rate of interest further increases inflation and cause more serious problems.
But from where does these banks get those 4% extra??? They lend it as loan to companies who do business. Banks earn around 13-15% on it and only 9% is passed to us. Taking a loan is a liability for the companies who borrow it. it spoils there balance sheets. However if these companies borrow it directly from the common man companies can apparently save some 5 -6% by bypassing the middle man bank. Thats is where the concept of shares comes in picture. Many people buying shares too is a liability but it improves the looks and valuation of the company. Since company can save those extra 5% it can use it to expand its business. That means more profits for the the business.
Ideally company makes huge profits and the returns are much above 9%. Company shares this profit with every shareholder but with a preamble. The shareholder should also share the loss in case it happens. Banks shield the common depositor from this kind of risk. They give you 9% no matter what but companies give to 20-20% and possibly –50% as well. 🙂
But we can infer one thing from this. Irrespective of a share holder makes profit or no, he investing directly in company by bypassing the bank helps more to the company. It helps the economy in general. Since lots of money starts floating in the market many people get encouraged to do business.
That is one reason we see so many Indian companies are gearing up to compete with their global peers. TATA is now planning to buy Jaguare and Landrover. All this confidence comes from the fact that people have faith in TATA and they will give money to TATA whenever he needs it. Also his profit would mean that people who landed him money earlier will too gain a lot.
THE BRIGHT SIDE
The economy improves when there in lot of money floating in stock market. If the companies do good, the investor earns a lot. If he earns a lot he invests it back in the market to increase the floating money and hence it become a vicious circle. Many companies come up some become giants and some go bankrupt. Some loose money some gain money, but helps the industrialization of the nations. It enables our companies to expand and think big. Their expansion cause more employment and increases the standard of living of people. This demands better governance and more agility from government hence even the government thinks of improving.
If you visit IT parks and IT cities in hydrabad or banglore you will notice that they are significantly different from the other parts of the city.
The government with its mediocrities cant manage all this and thinks of privatizing or at least opens up grounds for the private players. Consider the telecome boom in india. BSNL alone couldn’t have caused it.
Since governement privatises loss making units, it saves money and can spend it on infrastructure. Here too government is thinking of privatization which would mean government can save a lot of money and utilize it for education etc etc .
This will increase employement and liquidity in money markets ensuring better performace of companies. This will reduce the risk and more and more people will invest in stocks.
THE DARK POSSIBILITY
Just the way india can loose a winning match it can turn the finale into fiasco. A war in subcontinent can shake up everything. Example the US companies will be reluctant to outsource to Indian S/w giants causing loss for them. The people who invested in them will loose money and hence will turn their back to the market causing another negative vicious circle. Less profit -> no investors, no investors -> still less profit
Populous decisions such as Employement Gurrenty scheme which will consume some 4 lakh core ruppees will transfer the public fund into corrupt hands. This money gets converted into black money and hence is not usable for the growth of the country. Real Estate Scams is another issue which can cause inflation for no reason.
Petrol Prices and Disel prices will touch sky soon ans unless we find some better source the stock markets will surely collapase one day. How closer that day will be a golden guess for everyone. Lets hope it not in next 20 or 30 or 50 years
Scientists and Economist guess that its within next 20 years.
Increasing rate of interest on PPF and FDs.
Putting regulations over companies such a ceiling price for cement and petrol.
Bending before Communists and adher to the theory that RICH are always BAD.
Corruption too is the biggest threat .
Current Status: by the time i wrote it see what government is planning to do :
New Delhi: In a move to help investors get better returns, the Government is putting Rs 10 thousand crores from the Postal Life Insurance and Rural Life Insurance’s kitty into money managers like UTI assets and SBI mutual funds.
Finance Minister P Chidambaram said that the decision was taken by the Ministry of Post and Telegraph.
“It’s a decision of the Ministry of Post in order to invest these funds in a manner that you will get a better return on these funds,” he said.
Adding that this investment strategy is broadly patterned on the National Investment Fund’s, Chidamaram added, “They are entrusting this money to UTI and SBI, who will mange these fund for them and ensure a safe and adequate return for these funds.” SOURCE : IBNLINE