STOCK MARKET BUBBLE
What is the first thing that comes in your mind when you hear ‘stock market bubble’? So we had been learning basics in the previous blogs, like corporate actions, jargons, and many other terms. The stock market bubble is something that happens at least once or twice in a lifetime, it is like an incident like you might have heard that ‘history repeats itself’, it is just like that and today, we will discuss it in detail.
So without wasting much time, let’s get started!
Stock Market bubble means, say there is a product whose actual value is less, but still, the people are paying more for it, and as a result, a bubble is formed which ultimately bursts after some time. It is said to be a bubble, because a price is constantly increasing and nobody knows the real cause in the increase and whether it should increase or not. And to look back in our past, there had been two major bubbles, due to which the crisis took place in the past.
Whenever there is a recession in the economy, then there are lots of reasons behind it and the burst of the bubble is one of the main reason for the recession. The major bubble burst happened around the year 2000, which was a dot-com bubble, and the next bubble burst happened in 2008 which was the housing bubble. The recession in these particular years had been a major one. Now there is a new bubble which is being created, that the experts are claiming over the internet. Now if there is a bubble or not, will be further stated.
But we seem to connect with the things if we look into our past. Let say we are facing an incident currently, but we aren’t able to comment whether the incident is right or wrong, but when we will think about the same incident in the future, then we can easily make out if the things happened for good or for bad. The same thing happens in the stock market bubble. Now there are certain incidents, which shows why there is a bubble in the market. We often hear about being optimist, we should always look at the positive side of the things. So the main reason why a bubble is created is optimism, people forget reality and try to look at the best side and we are so much involved in looking at the best side, that we forget the reality.
So, what happened is, the dot-com bubble in 2000 was that it was the first time when the internet was available. At that time, the software engineers and people in tech fields used to earn a lot of respect and money, like TCS and all were established at that particular time. So people were constantly investing in this without actually understanding the business they are investing in. Our human psychology says that “if you are not understanding anything easily, then it’s a human tendency to consider it to be the best one”, and the same thing happened in late 2000. So many of them started to invest blindly in the new tech companies and with the constant investment, the prices would tend to rise, and which should not happen in reality, as there were many companies that were not performing well but despite their failure to perform good, their valuation was rising. So when a new trend enters in the market, people start to invest continuously without understanding and thinking, in the pursuit of more profits.
People at that time, used to invest in the new tech companies like it happens in gambling, if it will be a win, then it will be a good fortune and profits will be in millions and billions, and if it will be a loss, then everything will be gone. So the people didn’t want to lose the opportunity, and this is the reason that the dot-com bubble was established.
Now after this comes the reality, then they realize that the hike that they have created by investing in the companies and the stocks is nothing in reality. Then the people start to sell the stocks that they have purchased, and they sell the stocks at such a speed that the stock market crashes, and this is how stock market crashes. The people start to sell their stocks in such a speed, that it starts to touch the lower circuit of the company. SEBI sets the limit of the movement of the stocks upward or downward of a particular day. The lower threshold is called a lower circuit and the upper threshold is termed an upper circuit.
Then in the Housing Bubble, people were assuming that the price of the property will always increase so the people started to buy houses by taking loans. So without any proper information and without any knowledge, people started to invest in real estate, just by looking at other people doing the same. It is said as Fear-Of-Missing-Out (FOMO), this is always in the minds of people, they don’t want themselves to be missed out, they don’t want to lose the opportunity. So the people don’t even think twice before investing because even they want to earn more profits like others without even thinking whether this particular investment will be fruitful to me in the future or not.
So the people blindly invested in real-estate and when reality showed them that there is no such increase in the price of real estate, and with this, the housing bubble expanded and it burst out causing a recession, unemployment and a major crisis in the economy. I would suggest you to look into dot-com bubble and housing bubble on the internet.
Now what is happening in this year is that because of COVID-19 people are at home in lockdown, now there are newbies who are interested in the stock market because they have heard that one can earn a lot while trading in the stock market and they think that investment is the right option so why not just start investing. So what they do is, they just start investing, without having the proper knowledge, without understanding the fundamentals of the company, which is not the right way, and when the people invest this way, the system starts to dis-balance. Assume this way, that a person who does not how to drive is driving a car, and you are there sitting at the back seat. Imagine!
And this is happening these days, people are entering into the stock market and blindly investing so that they can earn at-least Rs.500 per day in the lockdown and utilize the time period. But thinking of earning Rs.500 is not a problem, the problem is many people think of earning Rs 500 by investing Rs.1000, which is 50% profit, it is a problem because 50% profit is no joke. When you invest your money in a bank, the bank gives you 2–4% interest in a savings account.
This is something which is happening these days, many YouTubers and various other brokers showing fake screenshots in the advertisements showing how much they have earned, which is completely fake. And these are the bubbles that are getting created.
Say you have invested Rs.100000 and after 5 months you are getting an increased amount of 80 crores, i.e., 8000% increase, isn’t it shocking? Yes, it is, and when such things happen then it is considered that the mad money(people investing without thinking about it) is in work. This is the case of Ruchi soya Industry, within just a span of 5 month its stock price has increased by around 8000%. Last year this company was delisted from the stock market as the company was in heavy debt and the company was unable to repay the debt. Then Patanjali bought this company last year and it was bought out on leverage buyout which means that Patanjali took a loan to buy it and all the papers are with the bank which means that if Patanjali does not clear off the loan, then the company will be in the hands of the bank and the bank will sell the company to recover their loan amount.
We all know “little knowledge is a dangerous thing” when we know very little about the company, then we are only looking at the company. And previously Ruchi Soya Company was in huge debt and now Patanjali has cleared all the debts, so now in the front page of Soya Industry, we won’t find any debts or loans, and we would feel that the debts are clear and so we would consider the company to be safe in investing but Patanjali who cleared all the debts of Ruchi soya Industries is now themself in debt, that is 99% of shares is with the bank. So indirectly the front page is good but the back page is still the same. But people will not look into this way, they fear that they should not lose the opportunity so they are investing.
Here is what experts think about Ruchi soya industries, given below:
“J.N. Gupta, founder, Stakeholder Empowerment Services, a proxy advisory firm said, The problem is that the case has come out of NCLT (National Company Law Tribunal) and the company is allowed to relist even if there is one share with the public. But this causes a problem of liquidity. No one knows what is going to be the future course of the company and hence there is a lot of speculation.”
source- ThePrint
In January, when the stocks were listed again in the stock market after Ruchi soya Industry was taken over by Patanjali, then it was being traded at Rs.16.90 and just after 5 months, in the current market it is being traded around Rs.1500, which means that just in a span of 5 months you are earning 8438%, which is such a huge return and the main problem is that there is no seller, everyone is just purchasing, like you know what happens in the stock market if you have to be a sell the stock, you need to find a buyer, but there is no one to purchase, whom will you sell?
So, whether we are in a stock market bubble or not, we can’t certainly say. But one thing is very clear that there are many unusual things happening in the stock market right now, thus be cautious enough and observe the market carefully.
So that’s all from Vyolve Paisa for today, stay connected for being updated with more Financial stuff. Till then keep following Vyolvepaisa and continue to Evolve with Vylove.
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