Why in News?

The Indian stock market has seen a consistent decline over the past month, with key indices like the Sensex and Nifty falling nearly 1% on October 25, marking the fifth consecutive day of losses.

This drop represents a 7.5% decline for the Sensex in the last month - the largest among global markets during this period.

What’s in Today’s Article?

• Introduction to the Indian Stock Market
• Market Overview
• Reasons Behind the Decline
• Global Comparison
• Sectoral Impact on Small and Mid-Cap Stocks
• Outlook and Future Expectations

Introduction to the Indian Stock Market:

• Understanding shares:
  • Shares represent a unit of ownership in a company, not a physical asset.
  • Companies issue shares to raise funds for various needs.
  • Buying or selling shares requires going through a broker or stock exchange, and share prices fluctuate based on demand and supply dynamics.
• Types of investments: Investors in the stock market can choose between:
  • Long-term (Equity investments): Designed for extended growth, these are popular for their potential to yield high returns over time.
  • Short-term (Debt investments): Typically, lower-risk, these are intended for quicker returns.
• How does the share market work in India?
  • The Indian market is divided into two primary stock exchanges:
    • National Stock Exchange (NSE): A leading stock exchange in India.
    • Bombay Stock Exchange (BSE): One of the oldest and most established exchanges in India.
  • The Securities and Exchange Board of India (SEBI) regulates these exchanges to ensure fair practices and investor protection.
  • Here, securities like equities, bonds, ETFs, and derivatives trade at prices driven by demand and supply.
• Purpose of the stock market:
  • The stock market serves as a regulated, centralised platform where companies and investors meet.
  • Its primary goal is to facilitate business expansion by allowing companies to raise capital through the sale of shares, providing investors opportunities for profit and growth.

Market Overview:

• Sensex performance: The BSE’s 30-share Sensex dropped by 662.87 points (0.83%) on Friday to close at 79,402.29.
• Nifty performance: The Nifty 50 declined by 218.6 points (0.9%), ending at 24,180.8.
• One-month trend: From September 26 to October 25, Sensex fell by 7.5%, while other global indices experienced smaller declines or even gains.

Reasons Behind the Decline:

• Foreign Portfolio Investors (FPIs) sell-off: FPIs have withdrawn record funds totalling Rs 85,790 crore in October.
• Geopolitical tensions in West Asia: Uncertainties due to the West Asian conflict have weakened investor sentiment.
• Corporate Q2 results: Lower-than-expected corporate earnings have impacted confidence. Net profit growth of 502 companies slowed to 4.1% in Q2.
• Shift to primary markets: Money has flowed from the secondary market to initial public offerings (IPOs), creating a liquidity shortage.

Global Comparison:

• India has been the hardest hit among major indices, experiencing a 7.5% fall.
• Meanwhile, other indices like Shanghai (9.99%) and Hang Seng (3.85%) have surged.

Sectoral Impact on Small and Mid-Cap Stocks:

• High valuations and liquidity shortage: Small- and mid-cap stocks have dropped over 8% due to high valuations and limited liquidity, as retail investors divert funds to IPOs.
• Individual stock performance: Many small-cap stocks have fallen 20-30%, primarily due to valuation concerns.

Outlook and Future Expectations:

• Market analysts are cautiously optimistic about a recovery within the next two months.
• Despite the short-term pressures, the medium to long-term growth prospects of the Indian economy remains strong.
• Valuations suggest a moderate overvaluation but not at a level that would significantly deter long-term investment.