How do FI investors affect stock markets?

WHO ARE THEY?

FIIs are Foreign Institutional Investors. A term that is commonly found whenever there’s a discussion on stock markets. FIIs are entities (banks, insurance companies, mutual funds etc) registered in a country other than in which they are investing. For e.g. a US Mutual Fund which invests in the Indian Stock Market. FIIs usually pool large sums of money and invest those in securities, real property and other investment assets. As bulks of their investments are in the stock market, the inflow or outflow of money by FIIs affect the stock market movement significantly. If you follow financial dailies, you are bound to see headlines such as “FIIs remained net buyers”. “Net buyers” implies that foreign investors poured more money into the stock market than they took out, which is generally seen as a positive development as far as our economy is concerned.

In India, Foreign Institutional Investors are not permitted to invest in equity issued by an Asset Reconstruction Company. They are also not allowed to invest in any company which is engaged or proposes to engage in the following activities:- Business of chit fund, Nidhi Company, Agricultural or plantation activities, Real estate business or construction of farm houses (real estate business does not include development of townships, construction of residential/commercial premises, roads or bridges).Trading in Transferable Development Rights (TDRs).

FIIs VS FDIs.

FDI is defined as “investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.” Examples of FDI would include POSCO setting up a steel plant in Orissa (in-bound FDI), Tata buying Arcelor (out-bound FDI) and so on.

ARE FI INVESTORS BENEFICIAL FOR OUR ECONOMY?

The presence of institutional investors has its own plus and minus points.

On the brighter side –

  • FIIs always purchase stocks on the basis of fundamentals. And this means that it is essential to have information to evaluate, so research becomes important and this leads to increasing demands on companies to become more transparent and more disclosures. This will lead to reduction in information asymmetries.
  • The increasing presence of this class of investors leads to reform of securities trading and transaction systems, nurturing of securities brokers, and liquid markets.
  • FII inflow increasing every year will bring the very welcome inflow of foreign capital. Attracting foreign capital is the main reason for opening up of the stock markets for FIIs.
  • If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their high confidence and a healthy investor sentiment for our markets. They have improved the breadth and depth of Indian markets.
  • FII inflows help in financial innovation and development of hedging instruments. Also, it not only enhances competition in financial markets, but also improves the alignment of asset prices to fundamentals.
  • FIIs as professional bodies of asset managers and financial analysts enhance competition and efficiency of financial markets

On the Flipside-

  • There are always some dangers if certain limits are exceeded. Firstly, the foreign capital is free and unpredictable and is always on the look out of profits.FIIs frequently move investments, and those swings can be expected to bring severe price fluctuations resulting in increasing volatility.Infact the FIIs are greatly responsible for causing volatility in Indian market.
  • Increased investment from overseas may shift control of domestic firms to foreign hands.
  • The FIIs profit from investing in emerging financial stock markets. If the cap on FII is high then they can bring in huge amounts of funds in the country’s stock markets and thus have great influence on the way the stock markets behaves, going up or down. The FII buying pushes the stocks up and their selling shows the stock market the downward path. This creates problems for the small retail investor, whose fortunes get driven by the actions of the large FIIs.
  • FII flows leading to appreciation of the currency may lead to the exports industry becoming uncompetitive.

FIIs EFFECT ON STOCK MARKETS.

  • While analysing a stock, the percentage of FII holding is an important factor to be noted. When % holdings of FIIs increases in a stock its stocks price goes up and when it drops, its share price comes down. However, readers should not take that as a negative remark.  If an FII invests in a company, it also means that they see growth potential in that company.
  • If the number is too large then it’s easier for the individual entities to move out of a stock which would make stock price of the company very volatile and risky. So, investing in a company which has smaller number of FIIs could be a safer investment option.
  • A fundamentally sound company which has a consistent and stable FII shareholding would be an ideal candidate for investment.  When some FIIs exit from a good stock, its price actually falls thus giving  a good chance to invest in it. However be sure to check the reason for the FIIs exiting the stock. If it is due to change in the fundamentals of the company, it is a negative sign.

That sums up our topic in FIIs.

Have a nice Day !!

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1 Response to “How do FI investors affect stock markets?”

Sherin

September 19, 2012 at 1:16 am

Hey victor. U hav a really gud site here with lot of quality info. Keep up the gud work it’s after lots of search in net I could come across such a wonderful stuff thanks

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