A Liquid Market

So what is pushing the Indian stock markets to what may be called obscenely high levels. It just cant be something as lame as the India story which we get to hear from every one, yes India has vast potential for growth and the market is huge but then the market is higly overvalued and is most expensive of the new emerging markets. The PE ratio of sensex is more than 17. Yes, it is lower than the avg PE of 20 somethin in 90s but compared with other markets at such high levels the market is overvalued.

It is the liquidity of the market which is driving it even at such high level. The liquidity in Indian market is powered by a certain class of traders for whom we have a very derogatory term "speculator". These speculators are day traders who buy and sell stocks without taking any delivery ie. buy a stock and sell it on the same day which enables them to have ready cash everytime.

So, how does the liquidity drives the flow of money into an overvalued market? This could be explained by a simple example : Say Mr.Smith had invested some money in real estate, now he is in real need of the money so he wants to sell his property but since the market is illiquid( i hope the term is correct) he wont find a buyer easily so he has to lower the price to create some buyers or to attract the prospective buyers had he invested in the indian stock market, he would have found buyers ready to buy the stocks at current levels anytime, so he need not suffer loss while exiting any investment option. It is this feeling of security which forces the FIIs to direct their money to India even though the market is costlier than others in Asia.