Market sentiment

My mother once asked me whether she should invest in the stock market and my answer was ‘no’.   She had heard a lot about people making money from dabbling in stock and was thinking about investing some of her life savings to get a higher return.

But she was planning on going into this investment, without understanding the risk of venturing into share markets, which I had to explain to her, was not equals to putting money in the bank, which was a regulated financial entity.  

So am I saying that the stock market is not regulated?  For starters, as I explained to my mother, there is a big difference in putting one’s money in a bank as opposed to playing the stock market.  Although returns may not be high, by far and large, most banks are safe places to hold our savings.  But the question is does the common man understand what the Colombo share market is all about?

I could safely say ‘No’ – that in most people’s minds, it is a place where angels would fear to tread.  This is primarily because, the majority do not understand how sentiment works in the market; and that is what chiefly drives share prices up or down.  

The accusation currently floating in share market circles that there are investors who “pump and dump” shares, should be of concern to everyone, because if share prices are moving due to a hidden hand manipulating them; then it removes fair play, which would mean that the Colombo Stock Exchange has no level playing field.

The Colombo Stock Exchange and its regulators have come a long way from its fledgling days of over 20 years ago, when Aritha Wickremanayake was its Director General of the SEC.

Something significant about Aritha’s times was that he was very keen on sharing information with the media as to how the stock exchange and its regulators operated.  This was important to journalists because we were able to write about stock market goings on in the newspapers, creating a sense of transparency, which helped smaller investors to participate in the growing private sector economy in this country.  

I should apologise for taking a very simplistic approach to this rather complex problem, which the Securities & Exchange Commission (SEC), and high profile investors in this country are embroiled in.  They each will have their own reasons for what they believe in, but the most important thing for everyone to understand is to ensure that there is transparency in what is going on.  For that the media plays a very important role.  

Twenty years ago we did not have a Financial Times, a daily newspaper dedicated to the businesses of our country.   Today, we have several business magazines with several developed journalists even in the vernacular media.  This has opened the financial sector to be inclusive of a larger part of this country.

However, transparency is the question.  The general public needs to know about the fundamentals of the companies they would like to invest in.  We need journalists who are reading and analysing annual reports, to inform the public about the status of these companies, without them having to only depend on stockbroker reports. We need journalists visiting companies to understand what they look like and how they operate in reality and report back on them.  

If this information is made available in public space, then half the job of the regulator is done.  We don’t need so many rules to control the “pump and dump” operators, since one can only pump up the price of a share beyond its actual value if people are not aware of the actual value of the company.

Of course there are some small time investors who want to make easy money in the market and ride the wave of sentiment, knowing very well that they are going beyond the market fundamentals.   But, if they want to play that game knowing the risk, who is to stop them?

Do not for a moment think that I am saying the market does not need regulation.  But if that regulation has an overkill effect on sentiment i.e. does not allow investors to speculate about the future of a company when they are buying shares; then in all probability the regulator has over stepped the mark.  

The question now, when it comes to the SEC, is in deciding if it is of value to the market overall.  Has the SEC become a bureaucratic fossil?  Does its red tape add value to the market as a whole?  To decide all this, the first step should be proper stakeholder mapping.  

Once that is taken into consideration, the authorities need to figure out the level of sophistication required from the Colombo Stock Exchange.  For instance, where there is less regulation a certain level of understanding would be required to trade in the Stock Exchange as opposed to a market with regulations so well built in that it would be a safe place for the uninitiated.

What do we then need – an overregulated Colombo Stock Exchange which savvy investors would not like to play in, or a volatile one where sentiment rules? Or is there an in between?

(The writer, a PR consultant and head of Media360, was previously a mainstream journalist in print and electronic media. He also edits a new media website.)