SEBI’s Crackdown Sends Shockwaves Through SME Stocks
Over the years, I’ve had my fair share of experiences with various market developments. However, the recent buzz surrounding the stock exchanges has certainly raised some eyebrows. Commencing from October 3rd, the short-term Additional Surveillance Measures (ASM) and Trade For Trade (TFT) settlement rules are expanding their influence to encompass small and medium enterprises (SME) stocks, and the implications of this move are significant.
You might be wondering why there’s so much hullabaloo about SME stocks. Well, there are several compelling reasons. Firstly, a growing number of individuals have been placing speculative bets on these stocks, essentially gambling on whether their prices will rise or fall. Secondly, SME stocks often operate in relative obscurity, characterized by low trading activity and limited investor participation. This low level of activity makes them more susceptible to price manipulation by a select group of traders.
The phenomenal rise of SME Stocks
What often goes unnoticed amid the clamour is the remarkable rise of SME stocks in recent years. The BSE SME IPO index, designed to gauge the performance of these stocks, has delivered impressive returns. Over the last five years, it has achieved an annual compounded growth rate of 82.63%, and in the last three years, it has soared to a staggering 193% per year. To put this into perspective, a modest investment of Rs 1,000 made in September 2013 could now be valued at an astounding Rs 1.03 lakh in 2023. This remarkable growth trajectory shows no signs of waning.
The index was introduced in 2012 to track the performance of companies that join the BSE SME platform. It boasts a unique structure by exclusively including newly listed companies. In contrast to traditional indices like Nifty or Sensex, where constituent stocks can linger for extended periods, companies in this index are removed after just one year, creating an environment of intense investor interest. Some SME stocks have witnessed subscription levels of up to 713 times, and several have quadrupled in value within a few months.
With great potential comes great risk.
Speculative activities in SME stocks have sparked concerns. These stocks often have lower liquidity, making it challenging to buy or sell shares. Additionally, they can be highly volatile, susceptible to market sentiment and news. SMEs may have limited public information available, making it difficult to assess their financial health. Moreover, they face a higher risk of business failure due to resource constraints and competition. Regulatory changes and challenges in accessing capital further add to the risk profile. Low trading activity and the fear of missing out (FOMO) have combined to create fertile ground for price manipulation, often exacerbated by social media-driven hype.
The Role of Additional Surveillance Measures (ASM).
ASM serves as a safety net designed to safeguard retails investors. When a stock falls under ASM, it undergoes heightened scrutiny. If specific conditions are met, the stock might transition to a segment called Trade-for-Trade (TFT), where only delivery-based trades are permitted, making price manipulation considerably more challenging.
These rules come into effect when an SME stock experiences significant price swings in a short time or witnesses limited trading activity. They may necessitate additional margin requirements or seek explanations from the company regarding any corporate announcements that may have triggered the price fluctuations. Certain actions, such as pledging stocks or accessing intraday leverage, might not be allowed. The overarching goal of these measures is to ensure market integrity and prevent reckless betting that could harm investors.
In conclusion, staying well-informed is paramount. Stock investments offer excitement and promise but also inherent risks. To navigate this intricate landscape successfully, one must grasp the dynamics of the stocks they invest in and fully comprehend the associated risks. Diversification is key to spreading risk, and it’s crucial to maintain emotional detachment from factors such as greed, hype, or fear. Knowledge is your most reliable ally in this journey. Keep learning, stay updated, and remember that investing is a marathon, not a sprint. Your financial future rests in your hands, and equipped with the right knowledge, you can make informed decisions. Happy investing!
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