The market is rigged.

Around noon time yesterday shares in mid-cap and small-cap stocks suddenly plunged, some by as much as 62% in value. At first the selling was limited to 10-12 stocks but soon spread to all other companies in these sectors. Apparently the promoters of many of these companies have borrowed money against their shares from banks or other financial institutions. When a promoter of a company is already heavily into debt so that no financial institution is willing to lend to him he may pledge his shares to raise capital. Usually a bank will lend between 25 and 50% of the market value of the shares pledged with it. To limit its risk the bank will maintain its total lending to the agreed percentage of the shares pledged. Which means that if a bank has agreed to lend 30% of the value of the shares pledged it will always try to maintain that ratio. So, if a bank has lent Rs 300 against shares valued at Rs 1000 and the price falls to Rs 800 the bank will reduce its lending to Rs 240 to keep its exposure at 30% of market value. The bank does it in 2 ways - either by asking the promoter to pay back Rs 60 in cash or by selling shares if the promoter is unable to pay. This is called margin-call. The trouble is that if a bank sells a large number of shares the value is depressed further, forcing the bank to sell even more. Seems that a rumor went round yesterday that margin-calls had been triggered in many of these companies which led to the sell off. The Securities Exchange Board of India is investigating to see if a rogue trader placed large orders to sell certain shares to bring down their prices and trigger margin-calls. This is a common practice in all share markets where someone may sell a large number of shares that he does not possess to bring down the price of those shares and then buy them back at a lower price to make profits. This is called short selling. Trouble is that SEBI always probes a fall in value of shares but not when values keep rising for no reason.  After all, manipulation in the value of shares can occur in both directions. In August 2012 some companies lost 20-26% of their value and SEBI banned 19 entities from trading. So, why does the government want to trap ordinary people into such a manipulated market? The government has announced the Rajiv Gandhi Equity Savings Scheme in which a first time investor with annual income of less than Rs 1 million will get tax relief of 50% of investment up to Rs 50,000. Asset Management Companies are paying commissions up to 6% to Mutual Fund distributors to sign up customers. " The commissions paid by some fund houses are indeed very high. It is a mad rat race," said Nilesh Sathe, Chairman of LIC Nomura AMC. HT, 20 February. The share market is a gamble and there is a risk that people will get hooked and risk all their money in it. With disastrous results. We could see a lot of suicides in future.