Plummeting stocks always expresses the concerns of depression, hopelessness, sadness, recession and dejection in an economy. However, in actuality this is not the case; nose-diving stocks have a tendency to remove the distortion prevailing in the existing market, sabotage the artificiality persisting in the market, and dampening the inefficiencies hovering around. To support the above argument let us begin to look through the cost and benefits of sinking stocks.
There is a definite cost of tumbled stocks in the form of lost market capitalisation, risk of default, losts of investors as well as consumer confidence, which leave few options for corporations to raise capital from secondary market, no exit for non-performing loans (NPLs) of commercial banks. But, the above-defined variables is the by-product of inflated stocks which shouldn't be realised if market works on fundamental rather than speculations.
Conversely, benefits of dipping stocks are always on the cards like IPOs (Initial Public Offering) will be priced on its actual realisation value of stocks rather than on overvalued price. PIA would be the best example in this context; authorities had taken full advantage of inflated stock index and charged higher prices for IPOs.
Secondly, dipping stocks not only restrained IPOs to be over-subscribed, which has been widely misused by corporations and blocked huge liquidity of market for longer period of time, but also refrained the investor to submit multiple applications which will bring more equitable and just distribution of IPOs. Thirdly, inflated stocks cause capital flight from commodity to capital market and create distortions in different markets, fuelling uncertainty and slumps all over.
Therefore, stocks dippings impede inefficient capital flight, inefficient resource allocation and deliver stability in the long run.
Finally, KSE-100 index achieved a nominal growth rate of 100% in the fiscal year 2002-2003 and attained 60% plus growth in the fiscal year 2003-2004, and appeared as an emerging stock market among developing countries which sounds great. But, one must not forget that the likely hood of booming market even provides a boost to inefficient organisations that challenge the viability of capital market during the period of recession. Thus, it is important to have recession (correction) in the economy to ensure the elimination of inefficiencies, distortions and minimisation of systematic risk.