Black and White Friday
If Friday was just another day to you wherein you carried your bags to school/ college or focused on completing your projects before the deadline given by your boss then you've definitely missed a major event.
To me, Friday (13/3/20) was quite an exciting day (not because the next day was SATURDAY). It was a day filled with downs and ups. You might've guessed the substance of this article if you had read the newspapers.
This article’s focus is on the stock market. To be honest, this place is no man’s cup of tea. Even the best need a little bit of luck here. However, people don’t make money here by performing some kind of magic or by learning astrology. All one needs is common sense.
Black start:
Friday started just like any other day but little did people know that it was going to go down as one of the historic trading days. Trading commenced as usual at 9:30 in the morning and it was halted within the next half-hour. There was no technical glitch, yet trading was stopped for 45 minutes. This halt (circuit breaker if you want me to be technical) was mandated by SEBI.
Being curious readers one question must pop into your heads and I hope it is, “Why would SEBI do this?” and I hope it's not “Who is SEBI?” Well, for the former I’d be glad to answer but for the latter you have google.
The reason for the halt was the fall of NIFTY by 10%. Now I see another question popping up and if I’m not wrong, it's, “What’s NIFTY?” Be ready to digest some really useful information. The stock exchange is nothing but a place where shares of a bunch of companies are bought and sold. If you want to know the price of a company’s share, it is readily available. The price movements of the share can also be studied with the help of data. But what about the entire market. How do we know in which direction it is going? The market movement is an important indicator of how the country as a whole is performing. There are 1600 companies listed on The National Stock Exchange and 5000 companies listed on the Bombay Stock Exchange. Tracking price movements of all the companies is impossible for an individual. Even for a stock exchange tracking price movements of all the companies may seem irrelevant.
Let me prove it. Let’s compare two companies listed on the Bombay Stock Exchange. 1) Reliance - a company that needs no introduction, 2) Arambhan. Arambhan is a company with a market capitalization of 2.8 cr. Its impact on the economy is very little. On the other hand Reliance’s volume is so large that its performance has a great impact on the economy.There are many Arambhans and only a few Reliances. Factoring in performances of small companies may prove unnecessary and perhaps even misleading. For this reason, each stock exchange has an index. An index is a list of companies handpicked by a stock exchange. The companies are selected based on various criteria. The price movement of the companies listed on the index is tracked through points. The direction in which the index moves is assumed to be the direction in which the exchange as a whole moves. The most famous indexes are NIFTY(of NSE) and SENSEX (of BSE). Hope, you've started seeing sense now.
The circuit breaker was triggered when Nifty fell by 10%. BSE and NSE trading was stopped for 45 minutes as per SEBI regulations. SENSEX opened the day with 32000 points and fell below 29000 points, NIFTY fell by more than 1000 points to trigger the circuit breaker. The objective of a circuit breaker is to cool things down. A circuit breaker gives traders the time to rethink their strategies and act with lesser haste. Indeed, on 13/3 the circuit breaker proved to be extremely useful.
Ending on a high note:
Almost immediately after the reopening of trading, something magical happened. The market participants who looked extremely bearish initially were now buying with full force. The sentiment turned so bullish(in favour of buying) that by the end of the day, SENSEX had recouped all its losses and in fact finished higher than its opening position by 1325 points. NIFTY also fared well, finishing 433 points higher than its opening level.
No one can explain precisely why an event happens in a stock market as every event is a collective action of crores of people. One obvious theory is that most market participants go with the herd.
The herd Composition:
“Who initiated the big buying on friday?” is what would be addressed here. To be frank, I may or may not be right and this purely is my opinion. What happened on Friday was a historic intra day recovery (one day recovery) which was a result of the combined effort put forth by the bulls.
1.)Short sellers:
Don’t worry, you needn't disclose your height to become a trader. There are two positions a person can take in a stock market (long and short). When a person buys a share to sell it in the future, he is said to have taken a long position. If a person first sells a share, and then buys it he is said to have taken a short position. In a short position a person doesn't sell a share he owns. He borrows some other person’s share, sells it then buys the same company’s share in the market and returns it to the lender of the share. A trader who takes a short position in a company’s shares is actually betting that the shares of the company will fail. This is the only way he can profit ( sell at a high price and buy it at a lower price)
The short sellers of the first half hour on Friday must've been pretty proud of their predictions. The short sellers who had sold short initially on Friday couldn't have found a better opportunity to buy back the shares they shorted. This turnaround of shorters to actual buyers could have been a major factor for the buying rush.
2.) Initial sufferers:
Sellers who got burnt initially on friday would’ve definitely wanted to get back whatever they lost. The collective buying action of all those sellers is also a major factor.
3.)Opportunists:
Finally, the opportunists. Those who felt that share prices had gone low enough and were ready for a rebound. These guys struck it well and neat.
The above classification has been made only to explain the sentiments which caused the buying rush on Friday. It is not necessary that a person should be classified only under one head. A trader could have been a short seller for one stock, an initial sufferer for another or even an opportunist.
Conclusion:
Volatility in the stock market has now become very common. Crores of transactions happen every day. To many investors, trading has become gambling.We spend so much time doing enquiries for buying basic stuff like shoes, watches but do we put in the same amount of time to do some research about companies in which we put in our hard earned money?
One must remember that a share is only an entry ticket to a company. The price of a share ought to be determined by the underlying company’s performance, the strength of its assets etc. The demand for and supply of shares must reflect all these factors. However, nowadays we see companies being priced at absurd rates. Most investors have almost stopped looking into the strength of companies they invest in and simply put in money based on the trend in the market. This is precisely why we are able to see so much volatility.
A very famous quote goes like this- “Stock market is a beautiful place where people seldom make money using their intelligence and often make money through others’ stupidity. Today’s market presents thousands of opportunities to earn through others’ stupidity. “CASH IN”