The Story of Indian Stock Market unfolding – Part VIII By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 15, 2016 | Posted by bobbysrinivasan << back to blog

This is an ongoing conversation between a student and his professor.

Student: Professor, how important are the Foreign Institutional Investor?

Professor: I am glad you asked one this question. As far as I know, there are more than 1760 institutions registered to trade with our securities exchange commission. The ownership worth around $ 250 billion US dollars. Unlike citizens of India they can take their capital gains paying no taxes. The money is mostly routed through Mauritius and Singapore. They enjoy a special privilege because of the double tax treaty arrangement with the country. Through this all kinds of money including money earned illegally can enter our market, since the identity of the purchaser of shares is not necessary. Having said that FII are the most important players in the market, without their Indian stock market Sensex will be half what it is now.

Student: Because of their size are they in a better position to make profits in the market.

Professor: Yes. They are rich traders and they do extensive research before they enter our markets. They know what stocks to pick and when. When times are good they make a bundle and when times are bad they leave the market early enough not to get hurt.

Student: It is not fair. Is it?

Professor: Of course. It is! They say caveat emptor (buyers beware). There is a book written by a legendary currency trader, George Soros titled Alchemy of Finance. In the book he talks about the theory of reflectivity. What in simple term means the market movement affects the investor and the investor decision affects the market. For example, seeing the prices go up in the market the smart investor rush to buy the stocks. Just as the early bird catches the worm, the rich investors are ready to move in first while the retail investor is not in the scene at all. By the time the retail investor understands and invest the money the market would have moved up significantly. Essentially what I am saying is that the retail investor is last to recognize the potential of a stock and puts his hard earned money to work only to realise that he had paid a very high price.

Student: From your argument, I feel that the retail investor is short changed.

Professor: You can’t blame the market or the foreign institutional investors. They are bringing in the money. Our domestic savings is so inadequate that hardly a small portion of the population comes to play this game. You can’t blame the government. The foreigners bring in foreign exchange which really is our major chunk of our foreign reserves. Is there money to be made? Of course they bring in money but take out much more than what they brought in because of the big gains they make in our market. The foreign exchange our country earned through exports, the FIIs will take it with them.

Listen, trading and investing without understanding these facts is suicidal. For the same level of earnings, the share price could be 50, 100 or 200 rupees. It all depends upon how much money is coming in. But with astute knowledge and wisdom and trading skills, the retail investor can also make a decent return.

In the next blog, I will explain to you the essentials of trading and investment. OK.

Student: Much obliged, Professor.

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