
Suddenly there is a big leap in SENSEX index.457 points up in a single day.
The scenario is same across asian markets,roughly 5% jump. This is mainly due to FII activities. What is it? & How is it different from FDI?
Foreign direct investment (FDI) flows into the primary market whereas foreign institutional investment (FII) flows into the secondary market, that is, into the stock market.
Some of the features of primary market include:
1.In a primary issue, the securities are issued by the company directly to investors.
2.The company receives the money and issues new security certificates to the investors.
3.Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.
4.The primary market performs the crucial function of facilitating capital formation in the economy.
In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid.
FDI is perceived to be more beneficial because it increases production, brings in more and better products and services besides increasing the employment opportunities and revenue for the Government by way of taxes. FII, on the other hand, is perceived to be inferior to FDI because it only widens and deepens the stock exchanges and provides a better price discovery process for the scrips.
Besides, FII is a fair-weather friend and can desert the nation which is what is happening in India right now, thereby puling down not only our share prices but also wrecking havoc with the Indian rupee because when FIIs sell in a big way and leave India they take back the dollars they had brought in.The reverse will happen when they invest heavily on stock markets, more money pouring into market, resulting big leap.
Naras