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Message: <blockquote data-quote="sherlock" data-source="post: 10931992" data-attributes="member: 106046">Risks in the Stock Market Risks in the Stock Market (Pic: makemoneyonthestockmarket.org)  The bull market which began after the end of the war is over. The market continues on a slow and gradual decline. The Milanka Price Index has fallen by 10.97% since the beginning of the year. But the All Share Price Index has held on to a gain of around 5%. But if we consider the decline from the earlier peak, then both Price Indexes have fallen by 10 and 15%. The companies have shown higher earnings although the increase in earnings is now slackening. But they are still reporting positive results. The economy is growing well and is likely to grow in tandem with the world economy. But there are still doubts about how the world economy will perform in the near term since U.S growth is weak and its unemployment is over 9%.  The risk in the market is more from speculative activity. The famous economist Keynes drew a distinction between speculation by which he meant the activity of forecasting the psychology of the market and of ‘enterprise’ or the activity of forecasting the prospective yield of the stock market. He warned that speculation may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation”. What he meant was that when investors devote themselves entirely to speculating on the future prices of individual shares instead of forecasting the prospective yields of the shares then there could be a danger of a speculative bubble. How many investors today are forecasting yields and how many are forecasting the future share price on the basis of market rumors? The latter if it becomes the predominant activity of investors would constitute a danger of a bubble according to Keynes. The SEC thought that such a situation had arisen in the third quarter of last year and clamped down on broker credit which fuelled speculation. It did check the bubble enterprise and since then the market has been on a more even keel. What Keynes said was that while speculation is not harmful when there is also investment based on future yields it can be dangerous when all activity is speculative and not investing. We still do not see much investing in the market as opposed to speculating.  So the risk is there of a sudden panic caused by some external or internal factor. As long as the world economy is growing there is little risk of our economy not following suit although with some inflation? But there are internal risks like broker failures or the failure of a large investor in our market as happened when Raj Rajaratnam got into difficulties in USA and had  to sell a large quantity of shares he held in the local market.</blockquote>

Verification: Hathara warak wissa keeyada? (Hathara wadi karanna 20)

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