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Sunday, July 29, 2012

Small & Mid Caps Collapse upto 40%. What went Wrong?

Well known mid cap companies collapsed by 40% in just 2 days, What went wrong?
There are several mid cap companies which touched their year’s new lows on stock exchanges on Friday. The benchmark indices, however, fared well during the day. Sensex was up by 200 points and Nifty climbed 57 points at Friday’s close. Despite a rise of over 1% in both indices, several mid-cap scrips crashed to their 52-week lows.

Whatever be the reason (or rumour), Adani Group shares have been digging the bottom of late. Friday was no exception with the stock price of Adani Enterprises touching a six-year low of 171 per share, while Adani Power hit a record low of 40.75 per share. The Adani Enterprises scrip crashed 77.47% from its 52-week high of 759 per share while the latter was down by 64% from its respective high of 113.25.

Similarly, stock prices of Torrent Power, which recently posted a 70% fall in net profit in its first quarter results, have been at a 52-week low for the past two days. On Friday, the power company touched a three-year low price of 152.50 per share.

With the share prices of these companies at the yearly bottom, are they a good buy? Our experts suggest they are not worth the risk. This is happening due to margin calls, only small and mid-cap companies are facing this problem.

All the Sensex and Nifty-listed companies are being traded much higher than their 52-week lows. As these companies were strong, they never pledged their shares for liquidity. On the other hand, small companies, for expansions or for liquidity, pledged shares (loan against shares) and just then, the share prices of the companies started falling. The financial institutions, that took the shares of these companies against liquidity, had to sell the shares off at short prices. Hence, selling pressure increased and the share prices continued to fall.

This free fall is likely to continue, and investors should wait and watch for next couple of week, we believe only new reforms or measures from the government can help these scrips rise. Else, there is still a 10% room for them to fall further.

Is this matter of worry? Not at all, only thing which you need to take care of is to invest in fundamentally strong small and mid cap stocks. Infact, such corrections due to bad sentiments in market gives good opportunity to smart investors to invest in good companies with strong fundamentals at discounted price.

You can invest in Saral Gyan Hidden Gems and Value Picks for long term. Our analysts will never suggest you to take exposure in any of the stock which is sitting in huge pile of debt or pledged its shares to institutions for working capital requirement.

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