Anti Stock Market propaganda:

Truths and myths

by S.A. Azeez-Chartered Accountant

The Stock Market is an important part of the economy of a country and plays a pivotal role in growth of the economy. That is why the Government and even the Central Bank of a country keep a close watch on the Stock Market.

Whenever, a company needs funds for expansion or setting up a new business venture, they have to either take loans from a financial organisation or they have to issue shares through the Stock Market. Thus the Stock Exchange plays the most important role in supporting the growth of the economy by facilitating investment. One cannot underestimate the role played by the Stock Market in the economic progress of a country. The Stock Market is not a supermarket or a grocery shop where goods are sold at predetermined prices. A large number of buyers and sellers almost directly interact in Stock Market transactions. The trade of even one share one can make a difference in the share price. Companies from various sectors are listed in the Stock Market.

These entities comprise companies with different levels of performances and varying degrees of risk in their business. The future potential vary from company to company. Investments are made on short, medium or long-term basis. Prices in the Market are a reflection of these factors.

Large blocks of shares are bought normally on a long-term basis. Recently Parkson Retail Asia bought 60.6 million shares of Odel Plc at Rs. 23.50 per share, which was trading at around Rs. 16.50 in the market before the deal was negotiated.

A few days after the deal, share fell again to Rs. 22.50. If Parkson calculates the loss, it should be Rs. 60.6 million within a few days.

Fortis, one of the largest healthcare service providers in the world bought 64 million shares of Lanka Hospitals (LHCL) at Rs. 62. Now the share is trading at around Rs. 31 per share. If they calculate the loss, it should be Rs. 1,984 million. There are so many instances of similar value-based investments on a long-term basis in the Colombo Stock Market. All these investors are not fools.

There is big outcry about EPF investing in the Share Market. This is not the first time that EPF has invested in the Stock Market. EPF has made huge profits through Stock Market investments in the past. One has to consider realised gains or losses rather than book profits and losses. When investing in the Stock Market on a long-term basis one has to ignore the daily fluctuations in share prices.

In developed countries, pension funds invest a large proportion of their assets in the Stock Market. According to a recent survey in US, pension funds have invested around 43 percent of their assets in equities. In developed countries, economies are dominated by companies represented in their respective stock exchanges. Large funds such as EPF is essential for the development of the Stock Market in a developing country such as ours.

Investing in the Stock Market, like in any other business, requires a certain degree of skill, care and caution. Investors can also make their decisions based on advice from reliable experts or consultants.

Speculative trading is a feature of any Stock Market in the world. Stock manipulation is not permitted by any Stock Exchange. It is true that in our market a handful of shares were suspected to be manipulated. That does not mean the whole Market was manipulated.