Business studies cbse

*Q. What do you understand by the term EQUITY CULT ?*

Answer .
*EQUITY CULT*
Some stocks, regardless of their current fundamentals, are regarded as next big thing in the market based on the belief/rumors/stories that company will make a miraculous discovery or will receive a massive contract from the government or any clients. This discovery or contract has to be so massive that it will multi-fold the growth of the company. Such stocks are followed by many investors who believe this. Forget about the success of event.

So, "Equity cult" , refers to behavior when one stock creates a heavy interest among investors who wants to invest in the equity markets even though the company’s current fundamentals are insignificant.

For example,

XYZ Ltd. manufactures LED bulb in India. The company’s current annual sales is Rs. 50 million and it is making insignificant profit / loss.

Let’s say on Jan 1st, the share price of XYZ Ltd. is Rs. 40 per Share. All the publicly available information about the company (its earnings, contracts, operations, future plans) has already been factored into current share price.

On Jan 2nd, The news of possibility of XYZ Ltd. receiving massive order of LED bulbs worth Rs.100 million from Govt. of India came into market. Just based on the story, lots of retail investors buy the shares neglecting its insignificant fundamentals and due to heavy demand in the market, the share price goes up drastically up to Rs.60 in a day or two.

If the story turns out to be true, its potential growth & earnings are already partially factored in and will be fully factored in the share price once supply-demand stabilizes. If the XYZ Ltd does not receive an order, the retail investors may sell heavily and the price may come down to its actual level.

This entire Craze among investors about XYZ Ltd shares, based on the story described above, is equity cult.