National Network of Education (NNE) caught up with Professor Govinda Sharma, an Associate Professor at the SDM Institute of Management Development (SDM-IMD), Mysore, for his views on the current stock market crisis and the role of the day traders in it.

Here's what Professor Govinda Sharma had to say:

The movement of the Sensex is like a seesaw, going up and down. Of late, the variation is in the lower band of 10,000. There is a huge negative sentiment and as usual, everybody is anxious to find if the Foreign Institutional Investors (FIIs) are at the causal end - "Foreign Hand" at play. Let us pause to examine if it is so.

When BSE Sensex closed at 20873 on 8th January 2008, the total market capitalisation was $ 1870 billion of which FIIs cumulative investment was $ 66.8 billion. This works out to a contribution of 3.6% by FIIs to the Total Market Capitalisation.

On "Black Friday", the 17th October, when the Sensex sank below the psychological level of 10000, the total market capitalisation was $ 680 billion of which FIIs cumulative investment was $ 54.8 billion or 8.06%. Even though the FIIs were net sellers on the "Black Friday", their net sale amounting to Rs.915 crores (approximately $ 0.2 billion at Rs.48 per $) (one billion is one hundred crores), the impact of the selling of equities by FIIs on market capital amounted to (0.2 / 680 X 100) that is, 0.03%.

Interestingly, as our Finance Minister Mr. Chidambaram has always been famously saying, "For every Seller, there is a Buyer", the Domestic Institution bought up equities worth Rs.713 crores. Consider the position on 20th June 2006 (two years back) when the Sensex was 10000. The market capitalisation was then $ 553 billion, and FIIs share was 7.92%.

This should make the picture clear: the contribution of FIIs have never been more than 8.06% (in the worst of the times) and less than 3.6% (in the best of the times), to the market capitalisation. Therefore, FIIs are not really causing the fall. They are not simply big enough to be rattling the economy. Therefore, "who" or "what" is causing the fall.

To understand this, we need to recognize that the twin forces of "Greed" and "Fear" have ever driven the share market. The Sensex shot up to 14,000 and "in better days", up to 20,000 by sheer greed. "Savvy" people call it as leveraging. With the first whisper of danger, the fear takes over and Sensex falls below 10,000! Once again, "savvy" people call it as de-leveraging.

Of whose fear and greed may we ask? The day-traders and the people who make money on the "momentum" of the markets. They are called "Scalpers". Yes, if it reminds you of the "scalp" being finely taken-off for profit, you are right - it is that! It appears scalp was a piece of the skin covering the skull torn off as a token of victory by some North American tribes. The world hasn't civilized much since then - has it? (Technically, Scalping is a trading strategy that attempts to make many profits on small price changes.

Traders who implement this strategy will place anywhere from 10 to a couple of hundred trades in a single day in the belief that small moves in stock price are easier to catch than large ones. Traders who implement this strategy as scalpers. The main goal is to buy (or sell) a number of shares at the bid (or ask) price and then quickly sell them a few paise higher (or lower) for a profit. Many small profits can easily compound into large gains if a strict exit strategy is used to prevent large losses.)

I know I am being unfair. To be blaming only the scalpers, who are like the kitchen knife at home, is being unfair. If the kitchen knife cuts a chicken, well, it is because the household asked for a party. Who are the households, if it is not you and me?!

A South Korean financial researcher was sacked for telling a TV talk show that people made unwise investments decisions because they were too greedy. Some one may be sacked tomorrow for asking investors not to fear and to hold on to the investments.

Gentlemen, market wants business and the fundamental forces of greed and fear are the engines of trade. You shall not question the driving forces of market. Where is the trading and therefore where are our commissions on every transaction if there is no greed or fear? So, let the party go on! Any body who questions shall be sacked!

To be fair, if there in no trade at all, needless to say, you as a long-term investor will never be able to get back your money when you want. Therefore, let there be scalpers. Like Gandhi would say, it takes all sorts of men to make a society - the scalpers too are required but in small quantities like the proverbial Pancha Pashanas of the Ayurvedic system of medicine.

To quote the celebrated economist Prof Adam Smith, "It is not through the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self interest…." People are driven by self-interest, me and you included. But, there has to be mechanisms to control this self-interest lest excessive self-interest can be self-consuming.

What we need to remember is fear and greed (need?) are primordial gifts given to us for survival. They are gifts if they are within our control and "enemy within" if they control us.

The "invisible hand" of the market place controls the economy but when this hand sometimes fails, we need to take control of the situation. Government and regulators will and shall do what they can and should.

Ultimately, it is the confidence of the long-term investors that sustains the market. Drop by drop we need to build. For our own sake and in our own self-interest. Listen to the wise economists like Mr. Chidambaram not to panic and sell but to hold on to your investment. Lust for lucre on the part of scalpers will overcome their fear and the Sensex will shoot up. When may be the question but then, it will, in good time. After all, it is only we, the long-term investors, who can help; I am holding all my good shares intact, wouldn't you?

Remember, if hopes are dupes, fears are liars!

(This article is an opinion of the author and not an advice. Opinions expressed are that of the author and not of the institute).