Behavioural Economics - An Introduction

Behavioral Economics is a emerging field which draws a lot of attention. This is a social science which is a combination fields of Economics and Psychology.Comprehensive research on this has been conducted first by Daniel Kahneman and Amos Tversky.
Behavioral Economics basically question the fundamental assumptions of Traditional economics they are :
1. Markets are efficient.
2. Human being make a rational decisions.
The fundamental assumptions of Behavioral Economics are quite opposite. They are :
1. Markets are inefficient.
2. Human being behave irrationally.
These irrational behaviour in our recent memory is 2008 recession and dotcom bust, where investors invested into shares without considering their Valuation.
One of the important concept in Behavioral Economics is 'Prospect Theory' which says

A theory that people value gains and losses differently and, as such, will base decisions on perceived gains rather than perceived losses. Thus, if a person were given two equal choices, one expressed in terms of possible gains and the other in possible losses, people would choose the former. 

Also known as "loss-aversion theory."
Behavioral Economics tend to explain why under a circumstance why an individual or company makes a particular choice.

 

China Economy is Struggling

It is rightly said that " When China sneezes, world catches cold" , The economy which has been an engine of World GDP growth for over a decade is showing signs of slowdown . Official forecast for GDP growth of current year is pegged at 7% but as per movement of railway cargo, electricity consumption  growth can be around 2%.
Economies around the world which flourished on China's demand for commodities are facing recession eg. Brazil is facing recession due to high debt, expanding current account deficit, Depreciating currency.
Among the emerging economies India is in a good position to take advantage as its macro indicators are in much better position compared to other emerging markets
The two factors which are currently affecting world economy are China growth and Federal Reserve rate hike, New insights can be drawn from developments coming in the month of September. 

Insider trading

Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.^[1]

In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders (in the U.S., defined as beneficial owners of ten percent or more of the firm's equity securities) must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. Many investors follow the summaries of these insider trades in the hope that mimicking these trades will be profitable. While "legal" insider trading cannot be based on material non-public information, some investors believe corporate insiders nonetheless may have better insights into the health of a corporation (broadly speaking) and that their trades otherwise convey important information (e.g., about the pending retirement of an important officer selling shares, greater commitment to the corporation by officers purchasing shares, etc.)

The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth.^[2] However, economists cannot be confident of this conclusion because data on illegal insider trading is not available; the nature of the activity renders it impossible to gather data.^[3]

Insiders can easily profit using "open market repurchases." Such transactions are legal and generally encouraged by regulators through safe harbours against insider trading liability.^[4][5]

Various types of speculators

“Four kinds of speculators operate in the Indian Stock Exchange. They are known as bull, bear, stag and lame duck. A Bull also called as Tejiwala is an operator who is hopeful of price rise in the near future.”

Four kinds of speculators operate in the Indian Stock Exchange. They are known as bull, bear, stag and lame duck. A Bull also called as Tejiwala is an operator who is hopeful of price rise in the near future. In anticipation of price rise he makes purchases of shares and other securities with the intention of selling them at higher prices in future. He being a speculator has no intention of taking delivery of securities but deals only in difference of prices. Such as a speculator is called a Bull because of his resemblance of behaviour with a bull. As a bull is famous for throwing up the opponent in the air, similarly a bull speculator also takes the price of securities high up in the air. He does this by placing high-value purchase orders.

A bear or a Mandiwala on the other hand is a speculator who is wary of fall in prices and hence sells securities so that he may buy them at cheap price in future. A bear does not have securities at present but sells them at higher prices in anticipation that he will supply them business purchasing at lower prices in the future. If the prices move down as per the expectations of the bear he will earn profits out of these transactions. 

Just as a bear presses his victims down to the ground, the bear speculator tends to force down the prices of different securities. It so happens that when bearish operators are bent upon selling securities, the prices also automatically come down. It is a usual practice that a bear is not interested in taking the delivery of securities but he is desirous of getting the variation in prices, provided the prices come down. In case prices rise then he will have to pay the difference between the prices at which he purchased the securities and the prevailing prices on the date of delivery. 

Then comes a stag. A stag is that type of speculator who treads his path very carefully. He applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He selects those companies whose shares are most in demand and are likely to carry a premium. He sells the shares before being called to pay the allotment money. A stag does not indulge in purchase and sale of shares in the market like a bull and a bear. A Lame Duck is nothing but a stressed bear. When a bear finds it difficult to complete his promise he is labeled as a lame duck.

WHO ARE SHARE MARKET PARTICIPANTS?

                                  In previous post we have learnt how share market works?.Now we will know who are the participants in share market.The participants in the share market are mainly divided in two

1. Individual retail investors
2. Institutional investors

                                  We all know individual retail investors are those individual who invest in stock market  

and institutional investors  for eg:Mutual funds,pension funds ,insurance companies etc  are those who receive income through premium,investment from their customers invest in share markets.In India LIC is the big bull i.e it is the word used for big investors.

                                  In retail investors they are divided into two types based on their investment purpose i.e traders and investors.Traders are those who hold shares for a very short period of time and they trade the shares for speculative purpose and on the other hand there are investors who invest in share for long term purpose i.e more than one year.

                                   To speculate(means to make profit from fluctuations) on a share the trader has to make a technical analysis on the shares (i.e this study is to analyse the movement of price with short term perspective)

                                For those who invest for long term perspective should do a fundamental analysis of the particular company viz it's financial strength,government support,operational efficiency etc.Because in long term company with strong fundamentals will only survive.

IN THE NEXT POST WE WILL LEARN ABOUT TYPES OF SPECULATORS.

HOW SHARE MARKET WORKS?

                                   In the earlier post we have discussed what is a share? Now the question is how share market or stock market works.
                                   First of all we should know what is a market.A market is place where goods and services are exchanged between buyers and sellers,or a market is a place where sellers and buyers interact with each other.Similarly share market is a place where shares are bought and sold.
                                   So the question is how the prices of these shares are determined?.They are determined   on the basis of demand and supply of a share in the market.And the demand of a share is dependent on the performance of the company,general economic situation in the economy,announcement of budget etc.
                                   for eg: take Infosys shares if the company has announced its quarterly results and if the results had reached the expectation of the market then the demand for the shares increases and simultaneously the share price also increases and viceversa
                                   It should be noted that not every time share prices are determined on the basis of demand and supply.Somtimes speculators tend to create artificial demand for a share and can increase it's price.
                                 

                                   

What is a "SHARE"?

                  Upto seventeenth century the world economy was primarily dependent on agriculture and its allied activities but after 1750 thanks to the Industrial revolution the situation has changed and there was a need for establishment of large scale industries.
                  These large scale industries used to make mass production and there was a necessity for huge capital investment.To provide these capital many types of business organisations has evolved such as sole proprietor,partnership etc.But they were unable to provide such huge capital.
                   Then evolved Company form of Organisation which can provide huge capital.The question is how companies can raise huge amount of capital?
                    A company first decides its capital requirement take for eg:100000. then this 1 lakh is divided into 10000 shares of RS.10 each and these share are sold to the public. There by making then the Shareholders of the company.Since they have contributed to the capital of the company they are the owners of the company.
                     There another question arises i.e since shareholder are the owners can they manage the day to day affairs of the company ?
                       The answer is 'no' because it is practically impossible for all the shareholder who are at different places to manage a company.So,they manage the business indirectly by appointing board of directors.
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