Speculation Syndrome...

Of late, there has been too much of volatility in the stock market. This is a bad news for the economy as it is likely to devastate the confidence of the small investors. This was one of the concerns raised by the parliamentary standing committee on Finance,recently. It is time Ministry of Finance, Government of India and the Capital market regulator, SEBI (Securities Exchange Board of India), cannot afford to take the issue of speculation with pinch of salt anymore.

One needs to know what is speculation and how it can create volatility to get the complete picture of what’s going around. Well, a person is said to be a speculator when he enters the market with the sole intention of making profit from price variations. Whereas a investor stays invested in the company for a long time reaping the benefits that the company may shower on its shareholders. Now the question is how does one speculate. This can be done legally by resorting to what is called margin trading, which is a system that allows one to buy shares without having money, by borrowing or selling shares without owning it. Hmmm….that must sound interesting. Yes , it is!! Here the speculator neither takes delivery of shares or makes payment. All he does is to square off the position. It means doing the reverse thing- taking a sell position after a buy position and vice versa. He can pocket the difference if prices moved in his favour. That’s speculation.

But speculation is not all that bad. It creates competition and helps discover better price for the shares traded. This indeed helps the companies to raise funds from primary market for their business projects.

However, too much of speculation can be catastrophic to small investors. Reason being not all speculators make profit and as a result the risk of default rises. Payments are deferred and delivery doesn’t take place. It is the small and retail investors who are left in a quandary.

Government and SEBI has introduced measures like, among other things, deposit for margin trading , rolling settlement to curb the menace of speculation. Both NSE (National stock Exchange of India ) and BSE (Bombay stock exchange ) follow a settlement mechanism of T+2, under which settlement, in terms of payment for shares bought and delivery of shares sold , has to be made on the third day of trading.

Well, that’s speculation for you!!