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Learn the Impact of the Foreign Institutional Investments on the Stock Market

Learn the Impact of the Foreign Institutional Investments on the Stock Market

“FII” is commonly used amongst investors in the stock market. This is because FII is such entities that pool large amounts of money and invest in financial securities such as real estates, investment assets and the stock market and more. As they invest the bulk of their money in the stock market, the inflow and outflow of money highly affect the stock market movement significantly. 

 

There are many headlines you see in the news when the stock market drops. For instance, Sensex falls 500 points on FII selling. Such incidents happen when FIIs pull their money from various investment sectors.

 

Nowadays Indian stock market has become the best destination for FII. Foreign institutional investors poured more money into the stock market than other investment sectors. They have to buy and selling powers in their hands and hence they can change the course of the market within minutes. 

 

In India, FII are bound to not invest in equity issued by Asset Reconstruction Company. Also, they are not allowed to invest in any organization who is involved in chit fund, Nidhi company, agricultural activities and real estate business.  

 

Before we take a dig deep into getting benefits from FIIs, let’s understand about FII and how do they affect the Indian stock market:

 

FII are those institutional investors who invest in a country outside on one where the organizations are based. For example, US Mutual funds invest in the Indian stock market. FII pools large amounts of money and invests in those securities that highly impact the stock market movements.

 

Why do FIIs enter the stock market?

 

Like any other investors, FIIs look for the investment opportunities which provide them better return against their investments. Keeping in mind, they primarily focus on emerging markets like India, China, Brazil and more. The main reason behind the selection of emerging countries is that these countries have been growing at a greater pace as compared to other developed countries and offer better investment opportunities for FII. India’s high GDP rate over the few years forced FIIs to invest in Indian stock market. Apart from growth, there are other important parameters such as liquidity, political influence and geographical conditions.

 

Although any stock market easily welcomes FIIs to invest their money, however, they have the potential to create chaos in the stock market. 

 

Why is FII important for developing an economy like India?

 

FIIs are good for developing economies such as India as FII investment strengthens the global confidence in an economy and stock market. 

For countries like India, the investment amount brought in by foreign institutions generally adds to foreign reserves which can be used by the government to import oil, machinery and more. 

 

FII investment in a country boosts the economy of that country which in turn makes FDI follow suit. With the significant increase of foreign investments in any country makes FDI take part in management such as joint venture, merger, investment in technology-oriented products and more. 

 

FII always purchases stocks by doing fundamental analysis of each stock such as evaluation, research of those stocks that lead to increased demand on companies to become transparent to retail investors. Secondly, FII cash inflow brings a large capital which is the main cause of the opening of the stock market. 

 

Needless to say, FIIs invest huge foreign capital in the Indian stock market which strengthens the confidence of local investors of Indian stock market. Also, FIIs cash inflow not only uplifts the stock price movements in financial markets but also improves the alignment of asset prices to fundamentals.  

 

Another crucial benefit of FIIs is that they increase the competition and efficiency of financial markets. 

 

FIIs Effect on Indian Stock Market

 

FII holding percentage is considered as an important factor while analyzing a stock. When a percentage of holding increases in stocks, the stock price goes high or vice versa. If an FII invests in any company, the growth of the company automatically increases. A financially stable company that has a stable FII percentage of holdings would be considered as a safer investment option. Hence, when FII removes its part of stocks from a company, the price of stock actually falls. 

 

Conclusion

 

FIIs hold a great contribution to Indian stock market, however, their investment percentage is fluctuating from time to time. Besides, FIIs investment in the Indian stock market is considered as a major factor that influences the stock price of a company. Hence, FIIs are a crucial economic indicator that helps investors to analyse a single stock and whole stock market in an effective way. 

 

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