The latest pronouncement by the Securities and Exchange Board of India (Sebi), giving an all-is-well certificate to the stock market, is a welcome development. Back in the 1990s, and for a year or so later as well, any sharp upward movement of stock indices would arouse strong suspicions of a scam. But that was then. Today, there is little doubt that a market with a capitalisation of over Rs 70,000 crore is a humungous entity that is scarcely amenable to manipulation by any cartel. Just for comparison, the figure is about one-and-a-half times the size of India?s entire GDP. At best, any synchronicity of trading actions can only move the share prices of a couple of stocks, and that too, for a brief period and not even a whole day. The ruthless price discovery process that has been made totally transparent by electronic trading makes any calibrated position extremely difficult to hold.
So, despite the big leaps that the Sensex and Nifty have registered lately, especially in September and October this year, a scam hunt is likely to prove a wild goose chase. The reasons for the ongoing rally are quite prosaic: valuations have by and large gone up, the rupee has appreciated and GDP growth continues to be fast. Or take another measure, market liquidity. The higher the liquidity, the better the price discovery. There are simply more trades taking place. And liquidity has been rising well enough to ensure that the market?s average ?impact cost?, the cost of executing transactions, has remained fairly constant over the past two years or so. What lessons does this hold for retail investors? For one, they shouldn?t let fears of a scam bother them unduly. Despite the overarching attention paid by analysts and authorities to FIIs and more recently domestic mutual funds as well, the BSE and NSE are retail dominated markets, and retail perceptions are important. The health certificate issued by Sebi should add to investors? sense of reassurance about the money they have invested in equities. But as in everything else in life, irrational exuberance does not pay. The stock market, like a densely packed expressway, remains a terrific way to reach the destination. Little else can offer quite the same returns so quickly. But falling asleep is not an option. So, go ahead and invest, but, as they say, keep your eyes on the road and hand upon the wheel.
