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Sunday, February 3, 2008

Why some stocks defy the law of gravity?

Companies that show spurt in share prices, but lesser trading activity, are generally closely held ones. No one really knows why stock prices shoot up on lower volumes

Shailesh Menon MUMBAI



    AVOLATILE market or no, certain scrips have been marching to a different tune on the bourses. Even as frontliners went into a free-fall, shares of companies like Amani Trading, Futuristic Securities or Responsive Industries were hitting the upper circuit amidst the most bearish trading sessions in the history of the BSE.
    To get a fair idea of the ‘Rambos’ among Indian stocks (see table), Amani Trading & Exports has risen almost 94% over the past 20 trading sessions from January 1, ’08. Even more baffling is that Amani Trading attained this feat on a average daily trading volume of just 219 shares. Likewise, Futuristic Securities and Responsive Industries have gained almost 163% and 117% on daily trading volumes as low as 473 and 56 shares respectively. And mind you, we are not talking about stocks that languish at extremely low levels. Amani Trading is currently quoting at Rs 293 while Futuristic Securities is around Rs 26 and Responsive Industries is trading at Rs 177 on the BSE.
    The reasoning for the hectic activity in these scrips cannot be attributed to the vagaries of market sentiment alone. There is the question of whether or not the scrip is available in the demat or physical form.
    “One reason for low volume-high price stocks may be because these shares have not been dematerialised as of now. Promoters or investors (who are trapped in the stock) might be trying to generate interest in these shares by trading them on odd-lot counters (specifically set for paper shares),” said a leading Mumbai-based broker on condition of anonymity.
    According to marketmen, though very meagre, shares in the physical form are still traded in Indian market. There are also instances where companies have converted their shares into the dematerialised format but investors still preferring to hold them in the physical form. This is because, investors may have purchased these shares with unaccounted money and they fear dematerialisation would bring into light their “black purchases.”
    Startling price appreciation-on-lower-volumes is also seen, when promoters try to jack up stock prices in order to better their valuation. This is usually done prior to making a private placement, opine experts.
    “Companies that are showing spurt in share price, but lesser trading activity are generally closely held companies. No one really knows why stock prices shoot up on lower volumes. In most cases, it is pure speculation,” said a senior analyst of a recently-listed brokerage.
    Share-price increase on low volumes is a negative sign, for any sustained upswing needs to be backed by increasing volume. In general, a price change on relatively low volume for a particular stock suggests an aberration.
    An important point to note is that most of these stocks are trading in the trade-totrade segment (or the T Group) on account of the surveillance action imposed on them. T-segment implies that all transactions in the scrip are delivery based in a bid to curtail excessive speculation. The exchange’s trading system also displays a pop-up caution message at the time of order entry in these scrips. All scrips under ‘T Group’ attract 100% margin while trading.
    “It is best in the interest of investors to stay from stocks that have very low volumes. Unless there is sufficient volume to support the new price, it will fall, possibly faster than it rose. A little volume with a price increase shows interest, a lot of volume with a price increase shows momentum,” say investment experts.

 

 

 

 

 

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