Why making money in stocks has become difficult?

Written by: Sunil Fernandes

Why making money in stocks has become difficult?
An investor wakes up early morning to learn that mining in the Bellary district has been banned. He loses heavily has he had bought the shares of JSW Steel, which sources bulk of its iron ore from places in Karnataka, including Bellary. Shares of JSW Steel lose around 20% in four trading sessions, as its Vijaynagar plant in Karnataka is starved of iron ore.

Another investor decides to buy the shares of Muthoot Finance considering that gold loan NBFC companies are growing at a scorching pace. A series of new norms including new loan to value and KYC norms sees the shares dropping sharply. Again, a loss of almost 30% in a few trading sessions.

Similarly, an investor in telecom stocks decides to buy based on the fast growth in the mobile telephony business. He has done a careful analysis of the balance sheets of Bharti Airtel, Idea and Reliance Communications and decides to buy them. Suddenly, DOT decides to term the 3G pact between telecom players as illegal and is preparing to fine them. The shares react and he loses money.

Other fine examples are the stamp duty hike in real estate in Maharashtra, where Mumbai based real estate shares saw a sharp reaction on the lower side.

There are several other industries where there is regular intervention from the authorities, which has ensured that a decision based on fundamental analysis has proven foolish. There are so many regulatory hurdles, that a single regulation can play havoc with the share price of the company. There seems to be little purpose in spending hours analysing a stock when an overnight regulation can cause a share price to plunge.

Typical examples more recently are the oil marketing companies which have not yet got the go ahead for increasing petrol prices. They continue to make losses and poor shareholders also loose in the process. Today, making money in shares does not depend on your own fundamental analysis of stocks but more on the regulatory environment, which if not favourable, can lead to colossal losses.

In March ahead of the Monetary Policy a lot of traders took positions in banking stocks hoping for a rate cut. The rate cuts never came and banking shares dropped. Traders are now waiting with eager breath the RBI's Monetary Policy Review on April 17, 2012 in a hope of a rate cut.

Making money today in stocks is about predicting the right policy outcome for the industry, rather than doing a fundamental analysis of a share.


Read more about: bse, nse
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