Liquidity can be the reason for market boom, is it enough to move the market over the long term?
New Delhi, Dhirendra Kumar. As an investor it is important to know why there is money flow in the market? What kind of stocks are coming in the money? What is the future outlook of those whose money is coming in the market? Is the money coming in the market, or are you seeing investment opportunities? The profit or loss can be estimated only by considering these things.
Liquidity may be the reason for the rise in the market for some time, but in the long term, only liquidity cannot move the market upwards. Liquidity is the reason for the rise in equity market. This is a different way of saying that stock prices generally will not go up until the net amount comes to the market. Here net amount means the difference between the amount that comes as a purchase in the market and the amount that goes as a sale.
For example, there was a purchase of 100 rupees in the market and sale of 80 rupees, then the net amount in the market was just 20 rupees. If this is true, the reverse is also true. When there is no net amount coming in the market, then the market remains around a level and when the net amount goes out from the market, the market falls. Actually to say that money is coming in the market, so the market is growing, to say the same thing in two different ways.
Till last week, there was a boom in the market, then people were speculating as to why. Certainly the immediate impact of Corona has not been as much as it was expected to be. But the story of Korana is not over yet. Companies and people around the world are scared about the damage caused by Corona. In such a situation, the strength of the stock market is slightly inappropriate.
The result of all these disparities is that a large proportion of investors are increasingly worried about the market and it is clear that this is happening due to liquidity. Central banks in western countries have only one trick left. This trick is – to put more and more money in economies. In the current situation, even the central banks cannot be called wrong, but the amount of money being pumped into the system is much more.
According to data available on the US Federal Reserve website, 40 percent of the total dollars currently available have been released after March 1 of last year. And this quantity is increasing every day. This is a huge amount and this amount will go somewhere. In response to this argument, you can see an opinion of media and analyst that liquidity alone cannot sustain the market in the long run. The Bank of Japan is a great example of this. The bank has been adopting this approach for decades, but its impact has not been significant. Apart from this, there are many examples which suggest that liquidity alone is not able to sustain the equity market.
However, it is not our job to get involved as an investor in an academic debate about liquidity. We are viable investors and we are here to earn. From this perspective, there is no basis for the debate about liquidity. Market growth is like a plant. Soil, seeds and weather, fertilizer and water are all necessary for the plant. Liquidity is just fertilizer. For the plant to become a tree, other things must be correct. However, our job is not to worry about all these things. We are here to identify and share information about roots and bearing trees.
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