What a fantastic way to kick out the year 2022, with fresh inflows of capital from overseas institutional investors driving the Indian stock market to new heights. Yes! The Nifty 50 and the Sensex both finished the first two trading days of the New Year in a positive position, with FIIs contributing inflows of Rs.902.64 crores.
Despite this, foreign institutional investors (FIIs) pulled their money out of Indian stock markets during the course of the previous year, particularly in the last months.
But as a trader in the stock market, I’m curious as to whether you’ve ever pondered the reason for the significance that we place on FII and DII activities.
Have Confidence! In the blog post that we will be discussing today, we will go over the significant function that FII plays in the stock market:
Understanding FIIs Foreign Institutional Investors might include mutual funds, hedge funds, pension funds, investment banks, and insurance corporations.
In economies that are still in the process of developing, they may be a useful source of capital. However, the overall amount of assets that FII may acquire and the number of equity shares that they can buy, especially in a single firm, are both subject to restrictions in many developing countries. One example of such a country is India.
Setting a limit is done for a number of reasons, the primary one being that it helps to restrict their impact on individual enterprises, the nation’s financial markets, and the possible harm that may be caused if they departed during a crisis.
In addition, in order to take part in the market, all FIIs operating in India are required to get themselves registered with the Securities and Exchange Board of India (SEBI).
Why should we look at the activities of FIIs?
There is some debate on the degree to which FIIs affect the movement of the stock market; yet, it is their research power that determines the direction of the stock market. As they purchase and sell stocks in bulk based on their research, buying/selling on their side may result in a rapid rise/fall in prices.
If we examine the statistics from the past, we can see that anytime people have pulled money out of their accounts, the stock market has seen a decline, and vice versa. Nevertheless, the effect is more pronounced and direct when people withdraw their cash, which causes indices to fall and destroys whatever supports that were in place. This may be understood if we compare the activity data of these companies with the levels of the Sensex and the Nifty as shown below:
Therefore, a retail investor is able to track them and monitor their activities, such as where they are investing, which stocks they are purchasing or selling, etc. Therefore, this will be of assistance to retail investors in that it will allow them to make a respectable amount of money without having to do any research or spend any time locating high-quality stocks.
When studying a stock, we as people are aware that it is not always simple to locate the information that is relevant to a certain firm. As a result, we are able to depend on them somewhat for the research portion of the project.
When foreign institutional investors (FII) purchase stock in a certain firm, it serves as a strong indicator to us that the stock may also do well in the future; thus, we may choose to purchase shares in the same company. Therefore, the amount of money that comes into their organisation is a reliable indication.
In a similar vein, we are able to carry out the identical actions when they sell a stock. If we are continuing to hold onto that stock while they are selling it, we may deduce that it is the appropriate moment to make a profit on that stock.
Pattern of Shareholding by Foreign Institutional Investors in Indian Companies
When doing research on various firms in which to invest, investors should also verify the holdings that FII have in each company individually. If they are raising their position in a certain firm, then it is a positive indicator since it suggests that they are convinced that the company will develop as a result of their study.
Also, if they are selling off more of their shares in a firm, this is a negative indicator since it suggests that the company is not expanding at the rate that they had anticipated, and it also indicates that they are pulling money out of that particular company.
The following graphic provides a breakdown of the shareholdings held by FII and FPI in Reliance Industries Ltd. By the same token, with the assistance of StockEdge, we are able to investigate the ownership pattern of any firm that is listed on the stock exchange:
What differentiates FIIs and DIIs from one another
The location of the headquarters of each organisation is the primary distinction between them. For instance, domestic institutional investors in India may be broken down into one of four categories: Indian mutual funds, local pension schemes, Indian insurance firms, and banks or other financial organisations.
In a similar vein, foreign institutional investors (FIIs) for India consist of hedge funds, pension funds, mutual funds, and international insurance firms that are headquartered in countries other than India.
Using StockEdge to do research on their behaviour:
StockEdge makes it simple for you to monitor daily, weekly, and monthly statistics, as seen below:
Bottom line
Therefore, we may get the conclusion that it is necessary to monitor the activities of both FII and DII in order to conduct an analysis of the entire movement of the stock market. We hope that you found this blog to be interesting and that you will apply its lessons to the fullest extent possible in the real world. Share this blog with your loved ones and assist us in achieving our goal of increasing people’s awareness of the need of sound financial management by showing some love.
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