A Different Touchstone for Capital Entry Into Stock Market

The capital market started its growing trend by the end of 1401 [March 2022-23] wherein the benchmark index reached 2 million units last experienced in 1399 [March 2020-21]; the subsequent fall of the index created numerous controversies among experts. At present, many capital market players and of course most people outside the market believe that the conditions are different from the market conditions of 2020, but comparing this juncture of time and what is happening these days is very important to understand the future developments of the market. Of course, the more the market situation is examined in these two time intervals, the less similarities are observed between the market conditions of 1402 (March 2023-24) and 1399, Abbas Argon, vice chairman of Money and Capital Market Commission of Tehran Chamber of Commerce, wrote for the Persian economic daily Donya-e-Eqtesad. A translation of this article follows: One of the major differences between the current market condition and the one in 1399 is that in the latter, the capital market grew on par with parallel markets and even at its peak, expanded more than other markets, to such an extent that in its peak days, the ratio of the price to the share profit in the capital market increased considerably, which was difficult to justify based on a fundamental evaluation and analysis. Therefore, at that time, some analysts, in order to justify the rise in stock price, pointed to its alternate value, which is not a criterion that can always be relied on to evaluate any type of company. But in 1402, most of the analyses are based on fundamental analysis, and most analysts consider profitability and the quality of profit as a criterion of share value. This year, the capital market lags behind other parallel markets much more than in the past and there is still potential for growth, as the inflation in the country has not yet been fully reflected on share prices. Also, in 1399, the entry of money and investment followed signals, sometimes without the support of social network analysis, was very popular, which ultimately caused some shares to experience prices higher than their real value. But this year, most investors attach great importance to the analysis and review of shares in their investment decisions and always pay attention to the value of shares. Therefore, it can be said that the market growth in 1399 was much more exciting than in 1402. *** Emotional Behavior Emotional behavior, in addition to showing itself in the sudden increase in prices, may also result in a rapid decline in prices when negative news is published, which happened in 1399. Therefore, the emotional behavior in the market includes the increase in price fluctuations and, as a result, the rise in investment risk. In other words, the risk of price fluctuations in 1399 was higher than this year, when we are witnessing less emotional behavior in the market. On the other hand, the policies of the then government in 1399 were based on channeling the liquidity into the capital market. One of the motivations of the government for this measure was getting funds from the capital market. Nevertheless, after a part of the financial needs of the government was met from the capital market, the government abandoned this market and after that, there was no significant supply to meet the demand and this caused long queues of buyers in the market. On the other hand, the limited range of price fluctuation at that time compared to the current conditions was another reason for the long queues and trading nodes. This issue has been partially resolved due to the increasing range of fluctuations and the readiness of trading systems to respond to the high volume of orders compared to the past. One of the factors affecting the outlook of capital market in 1402 is that inflationary expectations are still high this year, and this is also reflected in the analysis of the value of shares. Therefore, many stocks are still valuable in the eyes of analysts due to high inflationary expectations. *** Parallel Markets Another significant point in comparing 1399 with 1402 is that with the rise in prices in parallel markets, such as gold coins and cars, small capitals have practically lost the possibility of making investment in those markets. Investment restrictions in dollars have also been increased by the Central Bank of Iran. Therefore, the only market in which it is still possible to invest with any amount of capital is the capital market. The aggregation of small capitals in investment funds creates economies of scale and gives the funds bargaining power. This can be seen in fixed income funds, which by aggregating small amounts of individuals, gain more bargaining power against financial suppliers. By aggregating people’s micro-resources, stock investment funds are able to buy blocks of valuable shares and build up power to influence the management of their investable companies. A special potential of the capital market, which makes it more preferable than parallel markets such as cars, gold and dollars, is the possibility of injecting capital into productive economic activities, and if the policymaking institutions provide conditions that increase the possibility of participation of capital market activists in production projects, the prosperity of the capital market, in addition to becoming profitable for investors, can also contribute more to economic growth and the productivity of small capital in the hands of people.