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Stock Market Works on Rumors and an Individual’s Opinion on Such Rumors

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In the paper rumor in the stock market we can see that an individual cannot make precise decision on their investments if they do not have accurate information, as all these information’s are affected by the rumors in the market (Rose, 1951). It depends on various situations like fluctuations in the economy, policies taken by the Govt. be it national or international. Wars, famine, natural disasters all affect stock market directly (Nishtar, 1969). The law of efficient market hypothesis states that in the stock market any asset price would reflect on all available information an individual has (Fama, 1998).

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The main aim of any individual (investor) to enter the stock market is to earn profit or double their investments in the form of returns (Malkiel, 1989). But the stock market is volatile, which means it changes according to the market conditions and other external factors. This is proved by the efficient market hypothesis. But, the result is not always accurate (Subramanian, 2010). Hence, in this paper we are testing the semi strong form of efficient market hypothesis which states that any technical or fundamental analysis of the stock would not benefit the investor but only the new information about the market would increase the price of the securities.

In this paper we will talk about how the irregularities in the stock market caused by the similar policies taken by the government during the different terms affect the stock market price for the past 10 year. i.e. 2009-2019. Which means this paper tries to talk about how similar policies taken by the reign of two different governments affect the stock prices in the market. Through this study an individual will be able to acquire knowledge about whether any decisions taken by the Government can have an effect on the market, whether this can be predicted and used to a beneficial extent by an investor or not.

The variables we have taken is Semi-Strong Form Efficiency, Market Prices, on the basis of Make In India Policy and Digital India Policy has changed the market prices. The sector that we have chosen are for digital India, E-commerce Portals and for Make in India manufacturing sectors.

This paper helps an individual to have a grasp on how Government announcements could be one of the causes for the crash in the stock market. It was found that the influence of Foreign Institutional Investments on the movement of the Sensex became apparent after the 2004 general elections in India when the sudden reversal of FII flows triggered a panic reaction which resulted in very high volatility in the Indian stock. Thus through this paper it was evident that government announcements played a vital role in the discrepancies of the stock market (Pal.P, 2005).

The study tries to see whether the information of policies given out by the government is taken in by the stock market, and whether it affects it in return. This can be seen through the theory of Efficient Market Hypothesis. This theory states that all the information available is fully reflected in the market prices, thus affecting the way in which the stock market works. This may be in the form of weak form, semi-strong form or strong form, depending on what all kinds of information are available in the market, be it public or private (Lo, 2008).

It is obvious that the economy will be affected by any kinds of micro or macro factors, which in turn will affect the working of the stock market. Therefore, it becomes important to understand the pricing behaviour of the stock market and its indices. Different expert economists have different opinions regarding how such economic factors have a role to play in the effectiveness of the stock market. Some say that the effect will hardly be noticeable, and will not affect the stock market as such, even though no hard evidence have been given for the same. Others say that the impact on the economy by such factors will indeed have an effect on the stock market, no matter what (Sathyanarayana & Gargesha, 2017).

In the event of similar government policies which have been taken by different governments after making certain reforms, it may seem that it will have no significant effect on the stocks, and how they will be priced. However, in the paper titled ‘Effects of New Zealand General Elections on Stock Market Returns,’ the scholars have found that a change in the government will indeed have a very perceivable effect on the stock market changes. Depending on the mass followers of the political party in rule, and how effectively they bring about the policy changes, no matter how the same might have been done by a different party on a prior date, the effectiveness on the stock market pricing will be highly visible. Hence, the change in the government does play a very important role in how the stock market works (Abidin, Old, & Martin, 2010)

A study conducted on Saudi Arabian Stock Market regarding how the earnings announcements of stocks affect the market, with the help of semi-strong form of EMH gives the conclusion that semi-strong form, in fact, does not have any effect on the working of the market, i.e., the market does not adjust quickly according to the availability of information. This is also because the information gets affected due to abnormal returns which are seen to occur around the dates of announcements, thus leading to biased results (Syed & Bajwa, 2018).

Also, the moving of the market on the basis of announcements or information available depends on how much information is being conveyed into the economy. For instance, an analysis conducted by certain scholars revealed that earnings announcements made in the Chinese markets tend to have very little effect, as very little, or no new information is being conveyed. This shows that the Chinese market is not informationally efficient. This makes it difficult for the investors to assume a particular stand as they will not be sure as to whether the stocks that they want to invest in is correctly priced or not (Zou & Wilson, 2014).

Ever since demonetization occurred in India, the policies ‘Make in India’ and ‘Digital India’ have been gaining immense popularity. Alibaba Chairman, Jack Ma said, “We are excited about India. We are excited about Make in India and Digital India.” Xiaomi President Lin Bin too, showed his support and stated, “We have some big plans for India. We fully support Make in India.” The United Kingdom was also interested in these policies which lead to the partnership of UK’s BP Petroleum company and India’s Reliance Industries Limited for developing and producing energy. This partnership was called the Great Collaboration. Foxconn have decided to set up their manufacturing unit for Apple’s Iphone in India. Mercedes-Benz India MD & CEO Eberhard Kern said “India is one of the focus markets for Mercedes-Benz internationally, and with the addition of a new plant, we are getting future ready.” And the factory was inaugurated by Maharashtra chief minister Devendra Fadnavis and Union environment minister Prakash Javadekar. Huawei opened a new research and development (R&D) campus in Bengaluru (Baruah, 2015).

‘Make in India’ is an initiative introduced by Prime Minister Narendra Modi. His main aim for this reform was to not attract FII as there isn’t any proper utilisation of the resources within the country. It was introduced to make sure there would be an upper hand for all the domestic manufactures in India. This in turn would lead the individuals to endorse on home grown brands rather than international brands. It also provides opportunities for an new ideas as well as new entrepreneurs to enter the market, in the field of land, labour, capital, Entrepreneurship, technology, etc. which in turn would generate employment in India (Ecavade, 2018).

It’s evident from empirical data that any related type of information/announcement could trigger a volatile situation in a stock market causing prices fluctuations. This can be beneficially used by investors to make timely decisions regarding their investments, i.e. whether to buy or sell, and make gains accordingly.

We would be looking for any existence of a change in the degree of variances in stock prices when there is a change in the governing party, on the basis of whether the reforms and policies they have introduced has an impact on the decisions of an average investor which in turn would affect the prices in the market.

Cite this Stock Market Works on Rumors and an Individual’s Opinion on Such Rumors

Stock Market Works on Rumors and an Individual’s Opinion on Such Rumors. (2021, Feb 16). Retrieved from https://graduateway.com/stock-market-works-on-rumors-and-an-individuals-opinion-on-such-rumors/

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