It is said that money never sleeps. Only the money that you have in your wallet or safe or under your mattress is money that is not working. Any money that you put into a bank account, goes to work immediately. There are people within the banking system whose job it is to ensure that all the money that is there in the bank, other than the statutory reserves, is put to work.
Governments across the world create money. All money is debt, created out of debt. After 1970’s executive order by US President Richard Nixon, money is no longer backed by any tangible asset. US Dollar was taken off the gold standard by President Nixon.
Thus governments across the world create as much money as they want. Money creation itself causes a lot of problems. Excess money supply leads to inflation and reckless printing can lead to hyper inflation as witnessed in wartime Germany and many African countries even today.
Are we having excess money in our system right now?
Few indicators are how some IPO’s (Initial Public Offer) were received by the investing public.
Take the case of Chennai based Basilic Fly Studio, which came out with an IPO of 66.35 Crores. It’s issue got investment of 14,169 Crores, 224 times its issue size! Another company Oriana Power had an issue size of 60 Crores but got a bid of 7000 Crores, 116 times the issue size, meanwhile Krishca Strapping Solutions issue of 20 Crores got investment of 4319 Crores, 220 times its issue size.
What this goes to show is that there is a lot of liquidity in the market. People and organizations have a lot of money and they really don’t have an avenue to invest this money. They consider stock markets to be a place where they can invest at will and then sell at will, which feature is absent in any other investment. For example if you were to start a Chemist Store, you would invest in the premises or take it on rent and then furnish it and do the marketing and sales collateral’s. You would invest in stock too. If the business was to fail, all your investment in marketing and sales collateral’s would be reduced to zero and your stock would also have to be sold at a discount. That is why people prefer to invest in markets where they can get in easily and exit easily too.
As there is a lot of money chasing these stocks, they have been listing at a premium and those who got allotments are able to get out quickly with handsome profits.
What the future holds is not known thus some of those who get allotments sell and get out, others stay invested for the short term of six months to an year and some even stay invested for the long term.
The smaller the size of equity, the easier it is to maintain its price. Most promoters try to ‘manage’ their stock prices such that they can raise more money in the future. This is a bad practice, it takes the focus away from running the company efficiently and diverts it to running the share price of the company.
Point is that too much money chasing too few positive stories is a cause for worry. It will tend to concentrate investments into companies that deliver and thus cut down on innovation and breakout enterprises.