Monday, October 03, 2005

Small investors and traders

Saw an interesting debate during a few moments of break between channel surfing. It was between Kirit Somaiya and another person whos name I couldnt catch and it was about the rigging and circular trading in the market.

While Kirit talked about protection to the small investor (from the price rigging in some penny stocks), the fallout of which has been the banning of some 10 odd brokers from Calcutta (of all places) this other person had a pertinent point. He, of course, agreed that action has to be taken against those who rig the market. But he also placed an important question.Who is a small investor and who is a trader?

Logic here is that anyone who indulges in speculative activity is a trader and he knows the risk he is taking. Also, his take was that the small investor should not step into penny stocks or stocks that he has not researched about. Such a person is no longer a "small investor", but a trader or speculator. Small investors, he says, should enter the market through the blue chip route or through the MF or SIP route.

I agree and disagree. Circular trading as he rightly said wont succeed unless someone falls for it in the circle. The promoter operator nexus also wont succeed unless someone falls for it. Every investor or trader knows about the dangers of the market and especially fly by night promoters and stocks, so if they get stuck in stock rigging, then, well, god help them. I disagree because the rigging is not so simple as just a circular buy and sell. It also involves planting news, press releases dutifully printed by newspapers (knowingly or unknowingly) and a lot of other "lures". People are attracted to penny stocks with this logic: Invest in a one rupee stock and when it reaches two rupees, you have doubled your money. It is these practices which have to be rectified, regulated and punished.

I also read a recent piece on how many of the FIIs are actually Indian brokers with overseas accounts ( theres more at Sucheta Dalals website). If that is indeed true, then someone is going to get hurt soon. And that someone will necessarily be the proverbial small investor (and a few brokers).

Coming back to the question of a small investor and a trader, with the proliferation of online purchase, there is no great difference between them. In any case, the logic of risk shouldnt be used to justify a lack of regulation or an abetment of market manipulation.

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