Left Right

Notional Vs Real Wealth

Jul 22, 2015 | Dr C K Narayan | Uncategorized | 5 Comments

Notional Vs Real Wealth

Oftentimes we read headlines in the papers that ‘X-thousand crores wealth wiped out’, if reference to some market fall or the other. Seldom do we find the opposite- that so many thousand crores of wealth has been added! Why is that, I wonder? Maybe its because newspapers largely like to spread bad news I suppose! But thats not the point. What I am referring to is the fact that almost no one really takes those alarming headlines seriously. What is the reason? Isnt something that says we lost x-thousand crores of our wealth something to be taken seriously?

Perhaps it has to lie somewhere in the domain of belief that stock created wealth is not really “Real”- it is more notional. It goes up, it comes down, it stays the same, it falls rapidly, it multiples rapidly and over some time, it pretty much just ticks along, if we are lucky. This is how it is for most people. The few that have really built wealth thru stocks have an entirely different take on it. So,, when you consider stock created wealth as being notional, it is just a feel-good factor. Like living in a house in a nice neighbourhood whose value has gone up substantially. You know you never did anything to make that happen. You also know that you are not going to sell out your house just because its value went up. But its nice to know. Feels good to live in a house or locality that is valued high.

Perhaps it has to lie in the fact that much of the ownership is not with retail investors but with the institutions. The FIIs started to invest into India in 1993 and have been at it ever since. By now they own about 50% of all the good stocks, I think. Recently, I read that DIIs by now own 10% of the top 500 companies. The figures may vary, depending on whose research you are reading, but you begin to get the picture. The retail investor share is supposed to be 21% compared to institutional ownership of around 6-8% (another statistic that needs verification, I am just quoting what I last read) but in value terms the latter own considerably more than the former. Thus, any gains or losses that may happen thru erosion of market cap largely affects these Institutional owners and not the retail! Considering that less than 2% of our national savings are in stocks, the effect on the retail segment can certainly be considered minimal.

Contrast those figures to China where 80% ownership of stocks is with retail! The recent meltdown then must have been pretty tragic for the public! And China is not a market with F&O that is patronized by some people but not all. The 2008 fall in India hurt those that were excessively geared in F&O. But the China fall must have really hurt the investor the most. Here the erosion in market cap would definitely not have been notional but very, very real. It is difficult to see the market getting up after that kind of a hit. The Institutions, like sharks, will now be swirling around, mopping up stocks that will be thrown up by near dead investors. The Chinese markets are about to change, I feel. Institutionalisation will now get a leg up. Every crisis brings about some change for the better. I guess for China this fall may be the beginning of a change in the character of stake holders of stocks. In India, though, we will continue to be the way we were- until some big crisis hits us too?.

Comments(5)


  1. Sanjay Thakker

  2. Rabindra

  3. Harsh

  4. sayed shabbir

  5. Praveen

Leave a reply