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Re: preventing stock plunge



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Please help make the Manifesto better, or accept it, and propagate it!
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Stock market is not an abstraction, but it is a real market just like any
other
commodity market, as I tried to explain before. In contrast with ordinary
commodity
market, stock market has some special features, most important of them
being the
ability to influence major investment decisions by companies, which can affect
livelihoods of large number of people, who may not be investors at all.
Because of
this inter-relationship with the general economy, sotck market is an important
reflection of the state of the economy.
Second important feature of the stock market is the presence of large
number of
brokers, who claim to represent the interests of buyers and sellers. Now,
to what
extent they actually represent real buyers and real sellers, whether there
is any
speculative marketing, whether a handful of brokers ensure repeated buying and
cyclical selling of select scrips and create an artificial market etc are
the points
which come within the domain of regulation. SEBI is expected to see that
brokers or
anybody else do not cause any undue twists to the market indices and that
the index
fairly represents real transactions and real values of scrips as actually
prevalent in
the market. Stock market is not everything, as of course, the industries
have to be
set up, managerial decisions to be taken, workers should work, things
should be
produced, marketed and so on. All these features of what one could call
'real' economy
have to go on and stock market is just a part of the whole story. Obviously,
everything in stock market cannot be 'hype' and people are not fools to
keep on buying
and selling useless share papers without any real returns by way of
dividends, though
it would be a separate topic to argue about  the role of advertisements,
aggressive
marketing, ethical practices etc, pertaining to capital markets. To that
extent, I
agree with your statement that the two  parameters of people investing and
getting
returns out of the shares are good concrete indicators.
Now, regarding energy based economy,if I understand Param's concern
correctly,  the
idea is that the economy is regulated in such a manner as to give due
importance to
the energy factor. This is an ideal, just as Gandhiji wanted that "the
tiller of the
soil should get as much remuneration as the lawyer gets". To translate the
energy
conern into such an expression would mean some thing like, "Other factors
like land,
capital and manpower used in production remaining  the same, the value of a
product
should be inversely proportional to the non-renewable energy spent  in
producing it."
The basic thrust is not so much in use of a particular currency but on the
need for
the State to play such regulatory role. That can be done by using (a) rigorous
enforcement functions, like by closing down polluting industries after
taking care of
alternative arrangements for the workers and so on, (b)  fiscal policy,
i.e., by
taxation and (c) by monetary policy, i.e. by controlling overall
availbility of money
supply, adjusting interest rates and so on. These are the issues that
concern the
economy as a whole, and not confined to share markets alone.

sdcvamsi@yahoo.com wrote:

> ---------------------------------------------------------------------
> Please help make the Manifesto better, or accept it, and propagate it!
> ---------------------------------------------------------------------
>
> The stock market is an abstraction of the "real market(s)" at best or an
elaborate
> pyramid scheme at worst.  There are 2 parameters that are important here
that
> would tie this abstraction to the real world and those are: (1) purchase
of stocks
> and (2) the dispatch of dividends.  So, if we were to subscribe to any
principles
> of "conservation" of this or that then how is it that your theory below
would
> "prevent the stock market plunge"?
>
> PS: "real markets" are not so "real" either but that is a different issue!
>
> Sincerely,
> Vamsi M.
>
> venugopal wrote:
>
> > ---------------------------------------------------------------------
> > Please help make the Manifesto better, or accept it, and propagate it!
> > ---------------------------------------------------------------------
> > 1. I think the concept of stocks and shares, their impact on the
economy  can
> > be understood by starting from looking at how a person saves.
Traditionally,
> > there were not many alternatives other than buying gold, or land. (Of
course,
> > in the traditional economies, there were cultural practices like a
person who
> > has earned substantial crop requiring to do some Puja and call all
villagers
> > for feast and  other charity-oriented acts, which took care of a
portion of a
> > person's surplus, though not everything was rosy with tradition.)As the
> > economy developed, a need arose for heavy investments for
industrialization.
> > That is how companies started getting formed and they started borrowing
from
> > banks and financial institutions. Other than borrowing from Banks, which
> > requires thorough scrutiny of their records by  the bankers and mutual
> > acceptance of the loan terms,  public companies have other option of
raising
> > resources from the public. It is to sell the  company's shares, by public
> > issue (or by giving 'warrants' or rights to existing shareholders),
which in
> > effect, increases the equity. The net worth of  a company is  the value
of the
> > shareholders' ownership and is equal to 'Assets minus Liabilities'. The
ratio
> > of debt to networth represents the ability of the company to raise
resources
> > from others in relation to its ownership value. This is called the
leverage of
> > the company. Bookvalue of stock is the networth per share.
> > 2. Now, the share market is just like any other market, say, a vegetable
> > market. Buyers want to buy and sellers want to sell and everyday large
number
> > of transactions take place. There are brokers who act on behalf of
buyers or
> > sellers and who offer to buy or sell on behalf of the clients. Now,
just like
> > price of any commodity, there is  demand and supply mechanism operating.
> > People have their own notions of value of each share based on their own
> > assesments, insights, advertisements and feedback . People make their own
> > decisions based on  their assesment of 1. Risk factor 2. Liquidity
factor and
> > 3. Return, not necessarily in the same order. People consider how
easily the
> > instrument could be encashed in time of need, upto what period it is
> > 'locked-up' and so on. Some who want to give least importance to risk
factor
> > and highest priority to return may go for high-yielding but risky
investment
> > options. . Those who want safety first may go for National Savings
> > Certificates issued by Post offices.While the supply of financial
instruments
> > is governed by the need to sell on part of the existing holders for
whatever
> > reasons, the demand is governed by people's assesments of a particular
share
> > of a company considering the three factors as above. Now, just like any
other
> > market, there is a point where the demand curve meets the supply curve and
> > that is the equilibrium price of that particular share. Now, suppose,
for a
> > company, such market price is more than its bookvalue. To take an example,
> > suppose the bookvalue is Rs 10 per share, but the market value is Rs 15
per
> > share, and suppose the company has a networth of Rs 100 crore. It means
the
> > company has 10 crore shares. Suppose the company requires purchasing new
> > machinery and needs capital. The company can consider issuing another
10 crore
> > shares at the rate of Rs 15 per share. If it is able to ensure public
> > subscriptions, or sell its shares, it means the assets and networth
each has
> > risen by Rs 150 crore, while the liabilities remained the same. Thus the
> > networth has now become 100 plus 150 i.e. 250 crores. The company has thus
> > reduced its 'leverage', which means, in future, it could raise debts from
> > financial institutions if need be, relatively more easily. With 20 crore
> > shares now, its bookvalue has become 250/20 i.e. Rs 12.50. Thus, by going
> > public at the appropriate time, the company has not only raised
resources but
> > also increased its bookvalue.  Thus, a buoyant financial market, where the
> > prices are higher than bookvalues of companies, stimulates growth in the
> > economy by attracting investment in certain sectors. Conversely, if the
> > financial market is low, it means the market equilibrium price of a
company's
> > share is lower than its bookvalue. If that happens, company will not feel
> > encouraged to go for public issue, even if there is a genuine need for
> > acquiring new machinery. If the trend continues, it may lead to a
situation,
> > where the company may decide to increase the bookvalue per share by buying
> > back its shares from the public, by dishing out cash. (Suppose the
bookvalue
> > now is Rs 10 per share, the company has a networth of Rs 100 crore in our
> > example and market value is Rs 5 per share. Company can decide to buy back
> > 4crore shares available with public by spending Rs 20crore. Assets and
> > networth both reduce by Rs 20 crore. Networth now becomes Rs 80 crore and
> > number of shares is now 10 minus 4 i.e. 6 crore, making the bookvalue 80/6
> > i.e. Rs 13.33 per share. Thus bookvalue increased from 10 to 13.33, and
the
> > company has increased its leverage, thereby making it more difficult
for being
> > able to obtain loans from banks) But the company had to spend cash to
achieve
> > this, by foregoing any real investment need for new machinery. Another
> > alternative that can happen in an economy in such a situation is that big
> > companies may find it easier to acquire or take over smaller companies by
> > purchasing their shares, without having to invest in new machinery or
> > equipment. Both these alternatives have an adverse impact on the overall
> > growth of the economy. Thus a market with falling share prices spells
problems
> > for the performance of the economy. Now it is also true that a
well-performing
> > economy with reasonably controlled inflaion and low unemployment rate
would
> > naturally lead to a growing share market. And a poorly performing
economy has
> > many consequences, with people not earning enough to be able to invest,
those
> > having some thing to invest not able to find attractive and safe
avenues for
> > investment, and thus leading to  poor stock market. Thus, it seems like
a kind
> > of chick-and-egg situation as to which causes which. But, I guess, a sound
> > economy is a pre-requisite in the long run for growing stock market.
> > 3. The crucial difference between the financial market and any other
commodity
> > market is that a share is just a document, representing a promise of a
> > particular kind of performance. You are 'free' to determine and
evaluate the
> > likely future performance promises of the company. There is a
possibility that
> > the promises may be kept and you may get fantastic returns. There is
also a
> > possibility that you may lose your amount invested, but that is it: you
will
> > not lose more than what you have invested. Thus you have agreed on
taking a
> > certain amount of calculated risk.  Of course this is all within the
overall
> > framework of public disclousures a company has to follow, as per
guidelines of
> > SEBI. Now, the Stock exchange indices are basically a measure of extent of
> > transactions in a particular day by comparing with  cumulative
performance.
> > Overall changes in the index denote the buoyancy or otherwise of the
> > investors. The share market regulator, i.e, SEBI regulates the market by
> > controlling certain minimum requirements on part of the brokers,
prescribing
> > margins, and so on, attempting to influence likely decisions of major
players
> > like Foreign Institutional Investors, domestic financial institutions
like LIC
> > and so on. Now, there can be a number of reasons for fluctuations in the
> > capital markets, ranging from performance of specific sectors,tax rates,
> > fiscal and monetary policies affecting the aggregate savings for
investment,
> > international business cycles, i.e. fluctuations in growth and
recession from
> > time to time, with no particular periodicity, Court orders affecting
growth of
> > particular sectors,  assesment of expectations of various players, global
> > financial situation, domestic political situation, and all other factors
> > affecting individual assesment of 'return, risk and liquidity' on part
of the
> > investors.
> > I think it is necessary that SEBI  basically ensures that the
transactions are
> > based on fair degree of transparency and individual companies adhere to
basic
> > standards and accouting principles, in order to ensure a level playing
field
> > in the sense that nobody should be in a position to artificially jack
up or
> > manipulate stock prices and the prices be strictly responding to a
number of
> > voluntary sellers and voluntary buyers. There is also a great long-term
need
> > for regulatory organizations like Registrar of Companies to be
transparent,
> > fair and open in enforcement. Similarly credit-rating agencies need to be
> > absolutely professional.  But, other than that, I am not sure if there
is a
> > need to take any measures to 'prevent a plunge', as plunge is as
natural as a
> > boom and essentially the stockmarket reflects the condition of the
economy in
> > the long run, notwithstanding short term fluctuations.
> > 4. Now, coming to the query on energy based currency, I am not  clear
on how
> > such idea could be practically implemented, as lot of theory still
needs to be
> > sharpened and tools made sophisticated so that it does not make the system
> > more cumbersome. Perhaps, what one should aim is to progressively ensure
> > greater accountability and enforcement of environmental standards. If law
> > enforcement is done rigorously, perhaps the fiscal and monetary
policies will
> > be better tools to guide the economy. The Capital markets automatically
play
> > secondary role in influencing investors' decisions. In order to make
'energy
> > based currency a reality', many more preparatory jobs will have to be
done,
> > like first building up a translation of various databases, like, for
example,
> > the economic survey, or reports of State Domestic Product from rupees to
> > energy-units and subject them to detailed scrutiny and interpretation,
which
> > is not going to be an easy task. Therefore I think it is too premature
now to
> > think of stockmarkets and energy-units. I hope this meets some of the
points
> > raised and I welcome others to participate/ add.
> >
> > "Komaragiri, Param (Param)** CTR **" wrote:
> >
> > > ... relevance of a stock market crash,
> > > stock 'points' they frequently say in a market plunge,
> > > what exactly happens in a stock trade ? is the value
> > > attributed to each stock too virtual? Is it going to whither away
> > > when energy based currency if at all becomes a reality?
> > > ...
> > > How do we ideally prevent a stock plunge to save an economy?
> > >
> > > Parameswar
> > >
> > >
> >
> > --------------------------------------------------------------------------
> > This is the National Debate on System Reform.       debate@indiapolicy.org
> > Rules, Procedures, Archives:           http://www.indiapolicy.org/debate/
> > -------------------------------------------------------------------------
>
> --
> Sincerely,
> Vamsi M.
>
> --------------------------------------------------------------------------
> This is the National Debate on System Reform.       debate@indiapolicy.org
> Rules, Procedures, Archives:           http://www.indiapolicy.org/debate/
> -------------------------------------------------------------------------


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This is the National Debate on System Reform.       debate@indiapolicy.org
Rules, Procedures, Archives:            http://www.indiapolicy.org/debate/
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