Expert Opinion

Published: Dec 29, 2021
Updated: Dec 29, 2021

Fickle barometer of the Sensex

Every other day I come across friends, some of them who greet me and say, ‘’Hey, the Sensex/Nifty are doing great, and investors are making tons of money.” Some others who have already invested in stocks in anticipation of hearsay profits tend to say, “Hey, I have invested in a portfolio, it went down slightly, I need to wait for my stocks to go up.” From a politician’s perspective, stock market indices rising means the economy is doing well as the stock market tends to discount all economic information in advance. Likewise, every person associated with the stock market or with no connection at all has his own individual perceptions.

In a perfect market, the Sensex truly reflects the Indian stock market movement. If the Sensex value increases, it signals a general increase in the prices of shares, whereas a decrease in the Sensex indicates a downward trend in the prices of shares. One can identify the booms and busts going on in the stock market through the Sensex/Nifty. The Sensex comprises the 30 largest and most actively traded stocks on the BSE, providing a gauge of India’s economy. The general perception of investors is that the Sensex denotes the overall growth and development of particular industries as well as the ups and downs of the Indian economy.

Further, the author has tried to decipher the overall sentiment of the Sensex in terms of how many stocks are really contributing towards the linear movement of the Sensex that point towards an unstoppable upside for the last one year. The table is self-explanatory and indicates that there are barely about 8 to 10 stocks that have been keeping up the positive movement of the Sensex. Of course, the contributory stocks are not static for gains. As these tend to have changing lifecycles over a period of one year as on a particular date, the trends of gains and losses are also likely to change. The table gives a picture for one year ending Feb 2, 2021. Of the total 30 Sensex stocks, 12 stocks did not give yearly returns as on the year ending on February 2, 2021. Nine stocks gave returns between 2% and 9%, and it is only 9 stocks which have contributed for returns ranging between 12% and 22%. Overall, the Sensex gave just 4% returns for the same period.

KEY TAKEAWAYS

1. When a stock tumbles and an investor loses money, the money does not get redistributed to someone else.
2. Essentially, it has disappeared into thin air, reflecting dwindling investor interest and a decline in investor perception of the stock.
3. This is because stock prices are determined by supply and demand and investor perception of value and viability.

It is important to understand that regardless of whether the market is rising (bull market) or falling (bear market), the prices of stocks are driven by demand and supply. The fluctuations in stock prices determine whether an investor makes profits or losses from the stocks. Faith and expectations can translate into cold hard cash but only due to something very real, that is to say, the capacity of a company to create something, whether it is a product people can use or a service people need. The better a company is at creating something, the higher will be the company's earnings and more the faith the investors will have in the company.

In a bull market, there is an overall positive perception of the market's ability to keep producing and creating. Since this perception would not exist were it not for some evidence that something is being or will be created, everyone in a bull market can be making money. Of course, the exact opposite can happen in a bear market. In other words, think of the stock market as a huge vehicle for wealth creation and destruction. No one really knows why socks go into the dryer and never come out (!) - similarly, the next time you are wondering where that stock price came from or went to, at least you can link it to market perception.

(Dr VVLN Sastry is a post-doctorate in Economics, a PhD in Law and Public Policy, a passionate economist and a financial and law expert.)