Stock market crashes can be devastating for individuals and the economy alike, yet they play a vital role in shaping market cycles and providing valuable lessons about investing.
Current market volatility is driven by several factors, such as inflation worries and disappointing Q2FY25 earnings reports from companies, along with a hawkish US Federal Reserve raising treasury yields and reinvigorating dollar rates.
1. High Inflation
An increase in inflation can quickly send stock prices tumbling, depressing market indices like BSE Sensex and NSE Nifty. Increases in inflation also reduce consumer purchasing power and have negative consequences for businesses dependent on consumer spending.
Rises in inflation often prompt the Reserve Bank of India to raise interest rates, making borrowing money more expensive for businesses and individuals, thus dampening investment sentiment and further decreasing market indices.
Leverage, or borrowing funds to invest in stocks, can increase returns during bull markets but be detrimental during bear markets. High leverage can cause huge losses as share prices plummet, forcing investors to sell assets quickly to cover losses - further exacerbating market index decline.
Choosing the right trading app that can provide information about the possible crisis in the stock market can be beneficial for investors.
2. Uncertainty Over Government Policies
As opposed to previous bull market rallies that were driven by factors like rising domestic investment and social equity, the current one appears to be driven primarily by leadership continuity and an anticipated boost in earnings cycle growth, although Morgan Stanley strategist Ridham Desai warns of other possible roadblocks which may hinder its progress.
Indian government plans to increase ethanol blended fuel use could have an impact on sugar stocks; and, the Reserve Bank of India's (RBI) tight monetary policy is leading to capital outflows from emerging markets, pressurizing the rupee, and decreasing investors' trust in both the economy and the stock market. By understanding how such forces may shape market direction, investors can better navigate volatility and reach their financial goals more successfully.
3. Profit Bookings
Profit Bookings occur when investors sell shares they own for realized profits, which causes money to exit the stock market and eventually cause it to drop in value.
Negative news about an industry or sector may cause similar ripple effects; for instance, if one company in that sector performs poorly it could prompt other businesses in it to suffer and fall as well.
Long-term investors utilizing profit-booking strategies to protect gains and rebalance portfolios use profit-booking as a strategy to minimize their losses during periods of high volatility, when losses could be magnified by leveraged investments. It can also help prevent overbuying during times of rising prices - however this strategy only works effectively if used by long-term investors who understand all associated risks.
Read more to find out the best mutual fund apps in India for value investing.
4. Uncertainty Over Global Market Conditions
Stock market volatility attracts both risk-takers and those seeking safety, making the stock market an intriguing proposition for both. Yet what drives its fluctuations?
Uncertainty over global market conditions is one of the key elements contributing to India's stock market volatility. This uncertainty stems from various sources, including Trump policies, changes by major global central banks in their monetary policy framework and preparations for Union Budget 2025.
Current uncertainty surrounding the global economy has contributed to lower-than-expected earnings growth and an increasing CAPE ratio, approaching those seen prior to 2008 financial crisis. A higher CAPE ratio suggests stocks may be overvalued and could require correction, prompting investors to act cautiously by selling shares.
5. Uncertainty Over Corporate Earnings
The Indian stock market is overseen by the Securities and Exchange Board of India (SEBI), and investors can enter this market by opening Demat and trading accounts with brokers, then buying or selling shares at market price; major indices such as BSE Sensex and NSE Nifty serve as indicators for market performance.
Corporate earnings can often be unpredictable when global economic conditions deteriorate, leading to earnings management by firms where discretionary accruals increase or decrease in response to changing conditions.
This can reduce reported income and increase current profits, which in turn can have an impact on the stock market. Thus, companies with greater uncertainty may be less attractive to investors; delays caused by this uncertainty could reduce growth opportunities further still.
No comments:
Post a Comment