Q.3) What are the factors driving up the equity markets despite the macroeconomic gloom in the economy. What are the risks involved in such situations for individual investors? (10 Marks)

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https://www.thehindu.com/opinion/lead/a-bubble-burst-is-no-figment-of-the-imagination/article35086853.ece

In the intro, mention the historic high levels touched by SENSEX and NIFTY recently.

In the body, mention the factors such as low-interest rates, increased saving of the class unaffected by pandemic, psychological factors, the tendency of markets to be futuristic etc for high levels reached by market.

In the risks, mention the lack of macroeconomic base could lead to the burst of the bubble harming the individual investors wiping out their savings.
Conclude by mentioning the make investors aware of the risks involved.

Comments

20 responses to “Q.3) What are the factors driving up the equity markets despite the macroeconomic gloom in the economy. What are the risks involved in such situations for individual investors? (10 Marks)”

July 2, 2021

Sonal Sharma

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Kindly review

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1. July 2, 2021
  
  Sonal Sharma
  
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2. July 10, 2021
  
  Swatantra
  
  Sonal
  
  Very good attempt. The structure of the answer is fine too. In reasons for rise, also mention about susceptiblity to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc. Rest of the points are good.
  
  In risks mention that it is trading, and not investment, that seems to be the mainstay of retail investors and this is what makes them more vulnerable to the vagaries of the market. Individual investors have actually contracted their holding of the market capitalisation, have constantly sold their stake to end up holding less than 20% shares now.
  Also,sustained decline in demand caused by waning disposable household income might bring down corporate profits also soon.
  
  Conclusion is good.
  
  You are writing good answers. Just be consistent. 🙂
July 2, 2021

Santosh kharat

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1. July 10, 2021
  
  Swatantra
  
  Santosh
  
  Don’t copy paste verbatim from the article, use simpler sentences and write in your own words.
  
  Keep the introduction simple by just saying that sensex and nifty both have been at historic highs in the past inspite of the pandemic. Also you can mention that RBI has warned about impending bubble burst.
  
  In reasons first 4 points are fine, 5th point is lacking clarity. You can avoid mentioning names of scholars etc, it will be hard to remember. You can avoid point 5 and mention in risks since most of the retail investors are involved in trading rather than investing, they are more vulnerable.
  
  After reasons of high, give a separate subheading and mention about risks- market is ignoring macroeconomic factors(fall in GDP, unemployment, real wages have plunged); sustained decline in demand caused by waning disposable household income might bring down corporate profits also soon; irrational exuberance; retail investors are as well susceptible to overreaction when negative news hits the market.
  
  Conclusion is fine.
  
  Breakdown the question into parts and use each part as subheading in order to address holistically.
  
  Read some other answers. Keep writing. 🙂
July 2, 2021

Utkarsha Yadav

Please review
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1. July 10, 2021
  
  Swatantra
  
  Utkarsha
  
  I think you can start with sensex-nifty, global financial crisis was not strictly a stock market crisis.
  
  In reasons also mention about behavioral factors like nudging, investors may not necessarily be always sensible or even capable of perceiving the larger picture, susceptiblity to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc. Rest of the points are fine, bonus marks for example.
  
  In risks involved,fall in GDP is one of the macroeconomic parameters only, you can add unemployment, fall in real wages in that point only.
  Some other risks involved- sustained decline in demand caused by waning disposable household income might bring down corporate profits also soon; irrational exuberance; retail investors are susceptible to overreaction when negative news hits the market; since most of the retail investors are involved in trading rather than investing, they are more vulnerable. Mention some of these too.
  
  The structure of your answer is good, I think you are short on points in this answer. Conclusion is good.
  
  Read some other answers. Keep writing. 🙂
July 3, 2021

SUMITA DOWERAH

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1. July 11, 2021
  
  Swatantra
  
  Sumita
  
  Good attempt. Introduction is good, in reasons you can write behavioral factors like nudging under separate point. Further you can add that investors may not necessarily be always sensible or even capable of perceiving the larger picture, susceptiblity to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc. Rest of the points are good.
  
  In risks, mention some macroeconomic parameters like fall in GDP, real wages etc. Also you can mention that most of the retail investors are involved in trading rather than long term investing which makes them more vulnerable (can give supporting data).
  
  Conclusion is good.
  
  Read some other answers. Keep writing. 🙂
July 4, 2021

Kartikey Singh

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1. July 11, 2021
  
  Swatantra
  
  Kartikey
  
  In introduction you can use the recent warning of the impending bubble burst by RBI in its report, instead of past examples. Factors mentioned are good, you can add increase in investment due to increased savings of the class not affected by pandemic, also can mention some biases like priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc.
  
  Risks mentioned are well articulated, but also mention about the precarious macroeconomic position- fall in GDP, rising unemployment, fall in real wages– at some time bound to have an effect; again you can mention behavioral factors such as irrational exuberance, investors are as well susceptible to overreaction when negative news hits the market.
  
  Conclusion is good.
  
  Overall nice answer, keep writing. 🙂
  
  5.5/10
July 4, 2021

Fauzyia Jafri

Hello sir please review
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1. July 11, 2021
  
  Swatantra
  
  Fauziya
  
  Your knowledge about stock markets is good it seems, you have mentioned some practical reasons and risks but certain points have been missed.
  
  In introduction I think you have used Swatch bharat and disinvestment to show the magnitude of Adani Group’s loss but clarity is lacking, in simpler way you can mention about recent RBI warning on impending stock market bubble.
  
  Take the help of the article above to make the answer more holistic. Don’t use terms like fomo, you can write in full if you want but better add economic terms- investors decision choices could be significantly influenced by ‘nudging’; susceptible to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc. Also, you can mention about the tendency to invest looking at profit, but profit may be due to cost cutting, wage cutting etc instead of sound fundamentals. Rest of the points are fine.You can club psychological factors, optimism and behavioral factors all under one point only.
  
  In risks involved mention about the precarious macroeconomic position- fall in GDP, rising unemployment, fall in real wages– at some time bound to have an effect; again you can mention behavioral factors such as irrational exuberance, investors are as well susceptible to overreaction when negative news hits the market.
  
  Conclusion is good.
  
  Read some other answers, keep writing. 🙂
July 4, 2021

Sushmita

Please review sir
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1. July 11, 2021
  
  Swatantra
  
  Sushmita
  
  Introduction is good.
  Factors mentioned are fine too but mention some economic and behavioral factors. In economic- low interest rate can be added in 3rd point of yours , more savings of class unaffected by pandemic- more investment. Also, you can mention about the tendency to invest looking at profit, but profit may be due to cost cutting, wage cutting etc instead of sound fundamentals.
  Behavioral factors- investors decision choices could be significantly influenced by ‘nudging’; susceptible to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc.
  
  In risks, in 1st point, FII share has reduced to 1/10th in trading, mention that, more trading by retail investors makes them more vulnerable. Investment of FII is still good. 2nd point is fine. In 3rd point, frame it better, you can’t say no link between economy and stock market, mention about the precarious macroeconomic position- fall in GDP, rising unemployment, fall in real wages– at some time bound to have an effect although not sure how much and when. Also, you can add that retail investors are as well susceptible to overreaction when negative news hits the market (behavioral factor).
  
  Conclusion is fine.
  
  Read some other answers. Keep writing. 🙂
July 4, 2021

ankita thakur

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1. July 11, 2021
  
  Swatantra
  
  Ankita
  
  Introduction is fine, you can also mention about the recent RBI warning about impending bubble burst.
  
  Factors mentioned are good, add some behavioral factors- investors decision choices could be significantly influenced by ‘nudging’; susceptible to the ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc.
  
  You can mention about poor macroeconomic fundamentals in risks only. Points are good. Also retail investors more involved in trading rather than long term investing can be mentioned in risks only.
  
  In conclusion, frame the sentences with more nuance. No one can be entirely sure of what ‘will’ happen. So instead of using will, you can use a more cautionary tone.
  
  Read some other answers. Keep writing. 🙂
July 9, 2021

Deepali Rajan

Kindly review @swatantra sir
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1. July 12, 2021
  
  Swatantra
  
  Deepali
  
  Introduction is fine, you can also recent RBI warning about impending bubble burst.
  
  Factors are fine. 1st point can be framed better, low interest rates are forcing investors to look towards stock markets in hope of higher returns. Low equity price is another issue. Rest of the points are fine. You can also mention about some of the biases- ‘priming effect’, ‘framing bias’, ‘anchoring effect’, ‘overconfidence bias’ etc.
  
  Risks mentioned are fine too. Also retail investors more involved in trading rather than long term investing which makes them more vulnerable. You can give supporting data from the article.
  
  Conclusion is okay.
  
  Keep practicing. Also you can read some other answers. 🙂
July 15, 2021

shivanshu pandey

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