THOUGHT OF THE WEEK
Weathering the Storms of the Stock Markets
A Stock Exchange, simply put, is an organized and regulated platform for the trading of financial products. Some of these products traded include stocks, bonds, commodities, currencies, derivatives, and so on. Modern financial exchanges have evolved from their initial form of open-outcry auctions literally, to more sophisticated electronic trading. The overall performance of a market is generally measured using varied indices, notable among them is the composite index.
Like every market, the exchange is prone to the effect times and season and as such has its own peculiar “ups and downs” when it comes to the performance of its underlying equities. A case in point is when the composite index witnesses a decline of 10% or greater decline. This is known as a market correction and can usually last for periods less than two months. This scenario is less severe and shorter than a bear market which on the contrary can be defined as a period when the stock market falls for a prolonged period of time, usually losing the value of 20% or more. A bear market is the inverse, or opposite, of a bull market in which stock prices persistently head upwards.
The Ghana Stock Exchange Composite Index (GSE-CI) has for the past few years seen a persistent decline in its performance. As at Friday 1st November 2019, the index showed a year to date (YTD) return of 16.43%. Can this be classified as a correction or bearish run? Prior to this week (week ending 01/11/19), which has seen one equity gaining some marginal appreciation, the preceding two weeks in a row witnessed no such appreciation with all the equities either losing value or having their value unchanged.
A sustained decline in stock prices can happen for a number of reasons, such as investors panicking over economic conditions, news of declining corporate profits, a correction from a previous bubble of stock overvaluation, financial crisis in one industry that has a domino effect and impacts other interdependent industries like in the case of the recent financial reforms which led to the notion of somewhat financial crisis. All these have the potential to lead to investor pessimism which can cause an increased sell-off of stocks, and there by reinforces the downward direction of the market…. To be continued