IRCTC’s rally derailed: Why?
The wild swings in IRCTC stocks have already sparked memes, but what caused the rising stock to suddenly
Ekdam se waqt badal diya, jazbat badal diya, zindagi badal di… This is exactly how IRCTC investors felt on Tuesday. Why?
Because the stock, which was gaining rapidly and even hit Rs. 1 trillion market capitalisation on Tuesday, suddenly came crashing down! And once it started the downward journey, there was no looking back. The stock has declined by around 32% since then.
But what caused this landslide that has shaken investors?
It is because the NSE put a ban on trading IRCTC's futures and options stocks on Wednesday.
Now, you must be wondering: if the ban was implemented on Wednesday, why did the stock decline on Tuesday?
It's because the traders saw the ban coming. More on this later. First, let’s understand futures and options a bit.
You see, futures and options contracts are essentially wagering tools. You bet on a certain stock going up or down, without actually buying or selling it. A pretty neat way to avoid blocking a lot of capital to just prove that you can predict the markets. It’s like betting real money on CSK to win the IPL, without buying the team. Get the drift?
Interestingly, brokers allow you to bet more money than you have on these contracts (this is called leverage). This adds an element of speculation to the market and opens retail investors up for very high gains or losses.
This seems to be like gambling! Isn’t there a way to curb it?
Well, here's where the F&O ban comes in. SEBI understands that in phases of a bull run, the market goes into a frenzy. This kind of speculative trading can cause stock prices to swing wildly and ultimately harm retail investors.
So, they have measures in place to stop futures trading if it begins to get too dangerous or unpredictable: they call it a “Market Wide Position Limit.” This limit has been set at 20% of the number of available shares (free-float). For example, if 500 shares of a company are available on the market the futures and options contract limit is 100 shares.
Now, stock exchanges want to be extra careful. So, when 95% of this limit is reached, they do not allow any new futures and options contracts to be traded. You can, however, still sell your existing contracts. To buy more contracts you will have to wait till the limit comes down to 80%.
How do you find out when this limit is approaching? Simple, you can keep track of this on the NSE’s website. That's what all the smart traders in the IRCTC counter did.
They knew a ban was coming. And the only way to lift it was by selling the contracts.
IRCTC share prices have gone up by 334% this year. So, the traders who had bet that IRCTC stock prices will go up in the future had already made a considerable profit. So they decided to hit that sell button as fast as possible, to cash in on it before the ban could reduce their profits further.
The more people sold IRCTC F&O shares, the more the prices fell. And they are still falling!
But, weren't investors and retail traders ultimately impacted by the declining prices? So, how is the limit protecting them?
In the good old days, stock market operators (people with access to a large cash pool) would drive the prices up and down, to their whims and fancies. Especially with small-cap stocks. This made the markets ultra volatile, scaring away genuine investors. SEBI, of course, does not want that to happen, and hence keeps this as a check.
Everyone loses small, so that no one loses it all. Fair, no?
Do you think IRCTC still has some steam left? Or is it the end of the rail (at least on the stock markets) for the company?
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