Karvy LTD 03 Format

TITLE OF THE PROJECT:
“THE BEHAVIOUR OF INDIAN STOCK

MARKET”
REPORT SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT
FOR
POST GRADUATE PROGRAMME IN MANAGEMENT
BY-
AMAL SAIKIA
REGISTRATION NUMBER: EIILM/PGP/08-09/4H007
SESSION: 2008-2010
August, 2009
UNDER THE GUIDANCE OF
Mr. Subhendu Mookherjee

Regional Head, West Bengal
&
Prof. Abhijit Chakrabarty

Faculty, EIILM, Kolkata
EASTERN INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT

6, WATERLOO STREET, KOLKATA – 700069
THE BEHAVIOUR OF INDIAN STOCK MARKET
Acknowledgement
For me, acknowledgement is a genuine opportunity to express my sincere thanks

to all those who have supported and encouraged me in the completion of the
project.
First of all, my sincere gratitude is extended to Mr. Subhendu Mookherjee

(Regional Head, KARVY Stock Broking Ltd., West Bengal), my external
guide, for his guidance and immense support for the completion of the project.
I further express my sincere thanks and indebtness to Ms. Mohua Chatterjee,

Branch Head, Dalhousie Branch and Mr. Amit Sonthalia, Branch Head,
Phoolbagan Branch, Kolkata (KARVY) who in spite of having a very busy
schedule helped me immensely.
I express my deep sense of regards to Prof. Abhijit Chakrabarty, (Faculty,

EIILM, Kolkata) my guide in the institute for his valuable guidance and whole
hearted support, which were of immense help for completing my project.
2
Declaration
The project report on “The Behaviour of Indian Stock Market” at KARVY

Stock Broking Ltd. is submitted by me in partial fulfillment of the requirement
for MBA from EIILM, is an original work of mine.
I declare that this project has not been published previously elsewhere; it is a
result of my own efforts and has been taken solely for the academic purposes. All
educational materials consulted in the course of study have been declared in the
Reference and all information provided in the project is true to the best of my
knowledge.
I have done this work independently under the guidance of Prof. Abhijit
Chakrabarty my guide in the institute. This work has not been submitted in full
or part to any institute or university for the award of any degree /diploma.
________________
Amal Saikia
3
TABLE OF CONTENTS
TITLE OF THE PROJECT:.........................................................................................1

“THE BEHAVIOUR OF INDIAN STOCK MARKET”.........................................................1
Acknowledgement....................................................................................................2
Declaration...............................................................................................................3
1.Company Profile:...................................................................................................6
............................................................................................................................. 7
KARVY STOCK BROKING PRIVATE LIMITED............................................................7
2.Introduction:........................................................................................................11
3.Objective:............................................................................................................12
4.Methodology:.......................................................................................................13
4.1Data Collection:..............................................................................................13
5.Data Projection and Analysis:..............................................................................14
5.1STOCK MARKET:.............................................................................................14
Function and purpose..........................................................................................14
Stock market investment:...................................................................................15
Main Participants of the Stock market.................................................................15
5.2 Functioning of the Stock Market....................................................................15
Contribution of Stock Market...............................................................................16
5.3 Stock Market and Economic Growth:.............................................................16
5.4 Stock Market in India: ...................................................................................17
POST-REFORMS STOCK MARKET SCENARIO:.......................................................17
How Stock Exchanges Operate:..........................................................................19
Pattern of Growth of Stock Exchange:.................................................................19
5.5Bombay Stock Exchange (BSE):.....................................................................21
5.6SENSEX - The Barometer of Indian Capital Markets.......................................22
Companies Listed in the Sensex:........................................................................22
4
Sensex milestones:.............................................................................................24
Graphical Presentation: ......................................................................................26
............................................................................................................................ 26
May 2009............................................................................................................ 26
Sensex falls:........................................................................................................ 26
The top 18 single-day falls of the Sensex have occurred on the following dates:
............................................................................................................................ 26
Major crashes since 2000:......................................................................................27
May 2006......................................................................................................... 27
Effects of the subprime crisis in the U.S. :........................................................27
January 2008....................................................................................................27
Gigantic drops of the SENSEX in a day................................................................28
5.7Major Indian Stock Market Reforms:...............................................................28
Securities and Exchange Board of India (SEBI): .....................................................28
Over-the-Counter Exchange of India (OTCEI): .......................................................28
5.8National Stock Exchange (NSE):.....................................................................29
Index-based Market-wide Circuit Breakers:.........................................................33
5.9FOREIGN INSTITUTIONAL INVESTMENTS AND THE INDIAN STOCK MARKET:. .33
FIIs Flows: ........................................................................................................... 33
6.Market Trend:......................................................................................................35
Where Did the Terms Come from?......................................................................36
Characteristics of a Bull and Bear Market:..........................................................36
6.1 BULL MARKET: ..............................................................................................37
Features of Bull market:......................................................................................38
Existence Period of Bull market:..........................................................................39
Factor responsible for Bull Market:......................................................................39
Bull Market Strategy:...........................................................................................40
6.2 BEAR MARKET:..............................................................................................41
Factors Responsible For Bear Market:.................................................................42
7.Volatility:.............................................................................................................44
RETURNS IN BULL PHASE AND BEAR PHASE:......................................................47
Analysis: ............................................................................................................. 48
8.Findings:..............................................................................................................49
Factors responsible for Volatility:........................................................................49
5
9.Recommendtions:...............................................................................................50
10.Conclusion:........................................................................................................51
11.Limitations:........................................................................................................52
12.References:.......................................................................................................53
13.Annexure:..........................................................................................................55
1. Company Profile:
KARVY STOCK BROKING LTD
KARVY is one of the premier integrated financial intermediaries in the country, which is into
businesses such as Merchant Banking, Stock Broking, Depository Participant Services,
Financial Products Distribution, Mutual Fund Servicing and Registrar and Transfer Agents. It’s
a premier integrated financial services provider, and ranked among the top five in the country
in all its business segments, services over 16 million individual investors in various capacities,
and provides investor services to over 300 corporate. Karvy covers the entire spectrum of
financial services such as Stock broking, Depository Participants, Distribution of financial
products – mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities
Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance,
placement of equity and IPOs.
BACKGROUND
In 1982, a group of Hyderabad-based practicing Chartered Accountants started Karvy

Consultants Limited with a capital of Rs.1,50,000 offering auditing and taxation services
initially. Later, it forayed into the Registrar and Share Transfer activities and subsequently into
financial services. All along, Karvy’s strong work ethic and professional background leveraged
with Information Technology enabled it to deliver quality to the individual. A decade of
commitment, professional integrity and vision helped Karvy achieve a leadership position in its
field when it handled the largest number of issues ever handled in the history of the Indian
stock market in a year. Thereafter, Karvy made inroads into a host of capital market services,
corporate and retail, which proved to be a sound business synergy. The birth of Karvy was on a
modest scale in 1981. It began with the vision and enterprise of a small group of practicing
Chartered Accountants who founded the flagship company Karvy Consultants Limited. It
started with consulting and financial accounting automation, and carved inroads into the field
of registry and share accounting by 1985. Since then, it has utilized its experience and
superlative expertise to go from strength to strength, to better its services, to provide new ones,
to innovate, diversify and in the process, evolved Karvy as one of India’s premier integrated
financial service enterprise. Thus over the last 20 years Karvy has traveled the success route,
towards building a reputation as an integrated financial services provider, offering a wide
spectrum of services.
6
The business of KCL includes:
 Equity services.
 Mutual Funds Services.
 Insurance advisory.
 Tax Advisory.
 Home Loans.
THE KARVY CREDO
 “Our Clients. Our Focus

Clients are the reason for our being.”
Personalized service, professional care; pro-activeness are the values that help the organisation
nurture enduring relationships with clients.
 Respect for the individual Each and every individual is an essential building block
of the organization.
 Teamwork
None of us is more important than all of us
 Responsible Citizenship
A social balance sheet is as rewarding as a business one.
As a responsible corporate citizen, Karvy’s duty is to foster a better environment in the society
where we live and work. Abiding by its norms, and behaving responsibly towards the
environment, is some of our growing initiatives towards realizing it.
KARVY STOCK BROKING PRIVATE LIMITED
Member- Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Hyderabad
Stock Exchange (HSE).
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freel towards
attaining diverse goals of the customer through varied services, creating a plethora of
opportunities for the customer by opening up investment vistas backed by researchbased
advisory services. Here, growth knows no limits and success recognizes no boundaries.
Stock broking services
It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate
as a wealth management and wealth accumulation option. The difference between
unpredictability and a safety anchor in the market is provided by in-depth knowledge of market
7
functioning and changing trends, planning with foresight and choosing one option with care.
This is what it provides in the Stock Broking services. It offers services that are beyond just a
medium for buying and selling stocks and shares, rather services which are multi dimensional
and multi-focused in their scope. There are several advantages in utilizing its Stock Broking
services, which are the reasons why it is one of the best in the country. Karvy offers trading on
a vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock
Exchange. More importantly, it makes trading safe to the maximum possible extent, by
accounting for several risk factors and planning accordingly. This crucial information is given
as a constant feedback to the customers, through daily reports delivered thrice daily-
 The Pre-session Report, where market scenario for the day is predicted.
 The Mid-session Report, timed to arrive during lunch break, where the market forecast
for the rest of the day is given and
 The Post-session Report, the final report for the day, where the market and the report
itself is reviewed.
To add to this repository of information, it publish a monthly magazine; Karvy, The Finapolis,
which analyzes the latest stock market trends and takes a close look at the various investment
options, and products available in the market, while a weekly report, called; Karvy Bazaar
Baatein, keeps the investors more informed on the immediate trends in the stock market. In
addition, the specific industry reports give comprehensive information on various industries.
Besides this, it also offer special portfolio analysis packages that provide daily technical advice
on scrip for successful portfolio management and provide customized advisory services helping
to make the right financial moves that are specifically suited to the concern portfolio.
Karvy’s Stock Broking services are widely networked across India, with the number of trading
terminals providing retail stock broking facilities. To empower the investor further the
company has made serious efforts to ensure that our research calls are disseminated
systematically to all our stock broking clients through various delivery channels like email,
chat, SMS, phone calls etc. Its foray into commodities broking has been path breaking and we
are in the process of converting existing traders in commodities into the more organized
mainstream of trading in commodity futures, both as a trading and risk hedging mechanism.
Depository participants
The onset of the technology revolution in financial services Industry saw the emergence of
Karvy as an electronic custodian registered with National Securities Depository Ltd (NSDL)
and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards enabling further
comfort to the investor by promoting paperless trading across the country and emerged as the
top 3 Depository Participants in the country in terms of customer service. Offering a wide
trading platform with a dual membership at NSDL and CDSL, Karvy is a powerful medium for
trading and settlement of dematerialized shares.
www.karvydp.nic.in
8
Distribution of Financial Product
The paradigm shift from pure selling to knowledge based selling drives the business today.
With the wide portfolio offerings, it occupies all segments in the retail financial services
industry. A 1600 team of highly qualified and dedicated professionals drawn from the best of
academic and professional backgrounds are
committed to maintaining high levels of client service delivery. This has propelled to a position
among the top distributors for equity and debt issues with an estimated market share of 15% in
terms of applications mobilized, besides being established as the leading procurer in all public
issues. To further tap the immense growth potential in the capital markets we enhanced the
scope of the retail brand, Karvy – the Finapolis, thereby providing planning and advisory
services to the mass affluent.
http://mfportfolio.karvy.com/
Advisory Services
Under the retail brand ‘Karvy – the Finapolis', it deliver advisory services to a cross-section of
customers. The service is backed by a team of dedicated and expert professionals with varied
experience and background in handling investment portfolios. They are continually engaged in
designing the right investment portfolio for each customer according to individual needs and
budget considerations with a comprehensive support system that focuses on trading customers'
portfolios and providing valuable inputs, monitoring and managing the portfolio through varied
technological initiatives.
www.the-finapolis.com
Private client group
This specialized division was set up to cater to the high net worth individuals and institutional
clients keeping in mind that they require a different kind of financial planning and management
that will augment not just existing finances but their life-style as well. For this purpose it offer
a comprehensive and personalized service that encompasses planning and protection of
finances, planning of business needs and retirement needs and a host of other services, all
provided on a one-to-one basis.
Quality Policy
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by
combining its human and technological resources, to provide superior quality financial
services. In the process, Karvy will strive to exceed Customer's expectations.
Quality Objectives
As per the Quality Policy, Karvy will:
9
 Build in-house processes that will ensure transparent and harmonious relationships
with its clients and investors to provide high quality of services.
 Establish a partner relationship with its investor service agents and vendors that will
help in keeping up its commitments to the customers.
 Provide high quality of work life for all its employees and equip them with adequate
knowledge & skills so as to respond to customer's needs.
 Continue to uphold the values of honesty & integrity and strive to establish
 Unparalleled standards in business ethics.
 Use state-of-the art information technology in developing new and innovative
financial products and services to meet the changing needs of investors and clients.
 Strive to be a reliable source of value-added financial products and services and
constantly guide the individuals and institutions in making a judicious choice of it.
 Strive to keep all stake-holders (shareholders, clients, investors, employees,
Suppliers and regulatory authorities) proud and satisfied.
Karvy has always believed in adding value to services it offers to clients. A top-notch research
team based in Mumbai and Hyderabad supports its employees to advise clients on their
investment needs. On a typical working day Karvy:
 Has more than 25,000 investors visiting our 575 offices.

 Publishes / broadcasts at least 50 buy / sell calls.
 Attends to 10,000+ telephone calls.
 Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises,
allotment / refund advises.
 Executes 150,000+ trades on NSE / BSE.
 Executes 50,000 debit / credit in the depositary accounts.
 Advises 3,000+ clients on the investments in mutual funds.
Achievements:
 Among the top 3 stock brokers in India (4% of NSE volumes).

 India's No. 1 Registrar & Securities Transfer Agents.
 Top most Depository Participants.
 Largest Network of Branches & Business Associates.
 ISO 9002 certified operations by DNV.
 Among top 10 Investment bankers.
 Largest Distributor of Financial Products.
 Adjudged as one of the top 50 IT uses in India by MIS Asia.
 Full Fledged IT driven operations.
10
2. Introduction:
Stock prices change everyday in the market. Buyers and sellers cause prices to change as they
decide how valuable each stock is. Basically, share prices change because of supply and
demand. If more people want to buy a stock, then the price of that stock moves up. Conversely,
if more people want to sell a stock, there would be more supply (sellers) than demand (buyers),
the price would start to fall. In financial term, this is called as Volatility. Volatility is a
symptom of a highly liquid stock market. Pricing of securities depends on volatility of each
asset. An increase in stock market volatility brings a large stock price change of advances or
declines. Investors interpret a raise in stock market volatility as an increase in the risk of equity
investment and consequently they shift their funds to less risky assets. Technically, volatility is
found by calculating the "standard deviation" of the daily change in price. If the price of an
investment moves up and down by large percentage amounts, and in short periods of time, it
has high volatility. If the price almost never changes, or only by very small amounts, then it has
very low volatility.
It has an impact on business investment spending and economic growth through a number of
channels. Changes in local or global economic and political environment influence the share
price movements and show the state of stock market to the general public.
The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the
investors. So, over- reactions and wrong speculation can give rise to irrational behavior of the
Stock Market. Excessive optimistic speculation of future prospects can raise the prices of
stocks to an extreme high and excessive pessimism on the part of the investors can result in
extremely low prices. Stock Market behavior is also affected by the psychology of “Group
Thinking”. The thinking of a majority group of people many times influences others to think in
the same line and the Stock Market behavior gets naturally affected.
Sometimes the Stock Market behavior is affected by rumors and mass panic. The prices of the
stocks fluctuate tremendously by the economic use even if it has nothing to done with values of
stocks and securities.
So, it is extremely difficult to make predictions about the Stock Market and the inexperienced
investors who are not that much interested in financial analysis of stocks; rarely get the
financial assistance from the Stock Market at the time of need.
11
3. Objective:
Share in the market offer a high capital appreciation but the movement of the share price is
always like a wave and tide motion of the sea. Volatility in the stock return is an integral part of
stock market with the alternating bull and bear phases. In the bullish market, the share prices
soar high and in the bearish market share prices fall down and these ups and downs determine
the return and volatility of the stock market. Volatility is a symptom of a highly liquid stock
market. Pricing of securities depends on volatility of each asset. It has an impact on business
investment spending and economic growth through a number of channels. Changes in local or
global economic and political environment influence the share price movements and show the
state of stock market to the general public. The issues of return and volatility have become
increasingly important in recent times to the Indian investors, regulators, brokers, policy
makers, dealers and researchers with the increase in the FIIs investment. Hence an analysis has
been made to know the volatility trend in the Indian stock market and the reasons for the bear
and bull trend in the market. Nifty and Sensex are taken as representative of Indian markets.
This project gave me opportunity to have an idea about volatility in stock market. This gave me
idea about and fundamental analysis in stock market and how trading is being done in stock
market.
The objectives of the project can be mentioned as below:
 To study volatility in Indian stock market while taking SENSEX of Bombay stock
exchange as a source of secondary data which broadly represent Indian stock market
along with NIFTY of National Stock Exchange.
 To study the factors which are making Indian stock market volatile.
 Build understanding of central ideas of stock market.
 Develop familiarity with the analysis of stock market.
 Furnish institutional material relevant for understanding the environment in which
trading decisions are taken.
 Understanding of Bull Market and Bear Market.
This project will be helpful to know volatility in Indian Stock Market and reasons for such high
volatility and would be able to take decisions for investment in volatile stock market.
12
4. Methodology:
Methodology means the methods, processes or tools used in driving the project. At the very
biggining, an overview of the stock market is given. The level of SENSEX at various points of
time and causes for the same is given. Some graphs and tables also used here. Bull market and
Bear market have been broadly described in the report. Volatility of Indian stock market is
analysed through graph and table. The returns in bull and bear phase are also given. Hence an
analysis has been made to know the volatility trend in the Indian stock market and the reasons
for the bear and bull trend in the market.
4.1 Data Collection:
All the data are collected from secondary source, i.e, magazines, newspapers, websites etc.
Data were collected from BSE Sensex and NSE Nifty. Sensex is a basket of 30 constituent
stocks representing a sample of large, liquid and representative companies. Due to its wide
acceptance amongst the Indian investors, sensex is regarded the pulse of the Indian stock
market. Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy.
Hence these two indices were taken for the study.
13
5. Data Projection and Analysis:

5.1 STOCK MARKET:
The Stock Market is a market for the trading of company stocks. In other words, Stock Market
refers to the business of buying and selling shares in companies and the place where this
happens is known as stock exchange.
The Stock Market is distinct from a stock exchange, which can be said to be an entity, say a
corporation or a mutual organization countenance within the business of bringing people and
sellers of stocks and securities together.
Function and purpose
The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded, or raise additional capital for expansion by selling
shares of ownership of the company in a public market. The liquidity that an exchange provides
affords investors the ability to quickly and easily sell securities. This is an attractive feature of
investing in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the dynamics
of economic activity, and can influence or be an indicator of social mood. An economy where
the stock market is on the rise is considered to be an up and coming economy. In fact, the stock
market is often considered the primary indicator of a country's economic strength and
development. Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their
consumption. Therefore, central banks tend to keep an eye on the control and behavior of the
stock market and, in general, on the smooth operation of financial system functions.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and
deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to
an individual buyer or seller that the counterparty could default on the transaction.
14
The smooth functioning of all these activities facilitates economic growth in that lower costs
and enterprise risks promote the production of goods and services as well as employment. In
this way the financial system contributes to increased prosperity.
The Financial System of the Market Performs Three Main tasks:

 It handles transfer of payments in the markets.
 It channels savings to investments with a good return for future consumption in the
Stock Market.
 It spreads and reduces the economic risks in relation to the players' targeted returns.
The smooth functioning of all these activities and facilitates in the Stock Market give economic
growth and the lower costs and enterprise risks promote the production of goods and services
as well as employment.
The stock market is one of the primary most important sources for companies to raise money.
The continuously rising share prices tend to be associated with increased business investment
and vice versa in the Stock Market.
Share prices also affect the wealth of households and their consumption. So, central banks keep
a bull's eye on the magnificent control and behavior of the market.
Stock market investment:

Stock Market Investment refers to the investment in the market; where exchange of company
stocks or collective shares of the companies and other kinds of securities and derivatives takes
place. Stocks are traded in Stock Market by the help of Stock Exchange.
The Stock Exchange brings the sellers and buyers of stocks and securities under same roof. The
available stocks are listed and traded in the Stock Exchange among the buyers and the sellers.
Proper investment in Stock Market essentially requires detailed knowledge of Stock Market,
its’ participants, knowledge about the functioning, behavior and contribution of the stock
market.
Main Participants of the Stock market

The main participants of Stock Market are the individual investors, banks, insurance
companies, mutual funds and pension funds. Since, markets of today have turned more
“institutionalized”, the largest share of the market participation comes from the large
institutions rather than individual rich investors.
5.2 Functioning of the Stock Market

The stock market functions through the Stock Exchanges. Stock Exchanges can be a physical
entity and sometimes a virtual entity. In physical stock exchanges, transactions are made by
auctioning. In this case, a buyer offers a specific price for a stock by verbal bid and the seller
asks a specific price for the stock. When the buyer’s bid price and seller’s price match,
exchange of stock takes place. In the presence of multiple buyers and sellers market operations
are carried on a first come first served basis.
15
Contribution of Stock Market

Stock Market is the best medium of raising funds. Businesses which need financing for
expansion or improvement can easily raise required capital by participating in Stock Market.
On the other hand, for the investors; investing in stocks is a better option than investing in
property or real estate as the stocks contain more liquidity than any other property. This means,
stocks can be sold more easily and quickly than any other property and so, the investors can get
their money back by selling the stocks anytime they need.
The prices of stocks or shares in the Stock Market have strong effects on the economy in
various ways. Prices of stock influence business investment, individual household consumption
and wealth of individual households. For this deepening effect, Central banks of each country
keep a track of the Stock Market activities. A proper functioning of Stock Market in a country
can result in low costs, increased production of goods and services and increased level of
employment. In this way, an efficient Stock Market can contribute to economic growth of the
country.
5.3 Stock Market and Economic Growth:
A country’s economic growth is largely associated with the changing dynamics of its stock
market. Since Independence, Indian stock market has been incessantly growing. Many
government norms and regulations have been formulated so as to keep the market free from
trickery and deception. In spite of all these norms and regulations, Indian Stock market could
not be totally sterilized from scams; even through the performance was quite noticeable. But
the market got a boost after the financial reforms which opened the doorway for FII inflow.
Economic growth of the nations is closely linked with the liquidity of the stock market existing
in the country. The concept of liquidity that is dealt here is market liquidity, which stands in
sharp contrast to the definition of liquidity from the point of view of a firm. The stock markets
around the globe contribute to the economic development by imparting liquidity to the capital
investments. It is this market that allows entry even to the small savers, who invests their
savings for short peroids. The liquidity of the stock market enables them to sell off their shares
easily within a short span of time, which has undoubtedly attracted investments in shares.
However, the most profitable business requires long-term investments. When the small
potential investors reach the comfort zone in terms –term of investing in long-term equities,
they balance their portfolios more towards long-term investments. This balancing mechanism
forces the financial units to shift towards more profitable, productive and long-term products,
resulting in higher capital productivity. The higher-productivity capital boosts economic
growth and raises the returns on equity investment, which further increases the incentives to
save and invest and hence, furthers economic growth.
So, we have to focus on the linkage between the stock market and economic growth. On the
positive side, a well-functioning stock market helps in developing the economy through the
growth of savings, efficient allocation of investment resources and better utilization of the
existing resources. However, on the otherhand, the analysts view stock market as a place,
where the owners buy and sell stocks according to their convenience. This often affects the
profitability of the firms by affecting the funds available to them. In this processs, economic
16
growth gets hampered due to the volatile nature of the stock market. Hence, the aspect of
volatity needs to be addressed.
5.4 Stock Market in India:
The origin of the stock market in India dates back to the end of the eighteenth century when
long-term negotiable securities were first issued. The real beginning, however, occurred in the
middle of the eighteenth century, after the enactment of the companies Act in 1850 which
introduced the feature of limited liability, and generated investor interest in corporate
securities.
The stock market is also known as secondary market. In India, the secondary market consists of
recognized stock exchanges operating under rules, by-laws and regulations duly approved by
government. These stock exchanges constitute an organized market where securities issued by
the central and state governments, public bodies, and joint stock companies are traded. A stock
exchange is defined under Section 2(3) of the Securities Contracts (Regulation) Act, 1956, “as
any body of individual whether incorporated or not, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing in securities.”
Thus, astock exchange, (formerly a securities exchange) is a corporation or mutual

organization which provides "trading" facilities for stock brokers and traders, to trade stocks
and other securities. Stock exchanges also provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the payment of
income and dividends.
The securities traded on a stock exchange include: shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds. Everyday, stocks are exchanged and traded
in numerous stock markets around the world. The liquidity they bring a vital component of
economic growth.
Stock exchanges are open markets that trade financial assets. Whether associated with a
company or acting as an individual, a stock exchange is the place where stocks are bought and
sold. There are a number of major stock exchanges around the world and each of these plays a
part in determining the overall financial and economic condition of any economy.
Stock exchanges deal with a number of financial instruments such as stocks, bonds and
equities. Both corporate and government bonds are traded in stock exchanges. Equities include
popular investment options, rights issues, bonus issues, and all other forms of shares and
stocks. The actual trading of stocks takes place through mediators such as financial advisors,
brokerage houses, and stockbrokers.
POST-REFORMS STOCK MARKET SCENARIO:
After the initiation of reforms in 1991, the Indian stock market now has a three-tier form:
 Regional stock exchanges.

17
 The National Stock exchange (NSE).

 The Over the counter exchange of India (OTCEI).
The NSE was set up in 1994. It was the first modern stock exchange to bring in new
technology, new trading practices, new institutions, and new products. The OTCEI was set up
in 1992 as a stock exchange providing small and medium-sized companies the means to
generate capital.
The Organizational forms of the various recognized stock exchanges in India as follows:
 Mumbai, Ahmedabad, Patna, Indore ----------- Voluntary non-profit making.

 Kolkata, Delhi, Bangalore, Cochin,
Kanpur, Guwahati, Ludhiana, Chennai------------ Public limited company.
 Hyderabad, Pune, Rajkot, Magadh ----------------Company by gurantee.

 The National Stock Exchange -----------------------A tax-paying company incorporated
under the Companies Act and promoted by
leading financial institutions and banks.
 The Over the Counter Exchange Of India ----------A company under Section 25 of the
Companies Act, 1956.
Functions of Stock Exchanges: An Overview
The main function of a stock exchange is to facilitate the transactions associated with both the
buying and selling of securities. Buyers and sellers of shares and stocks can track the price
changes of securities from the stock markets in which they operate. The ups and downs of stock
indexes help the investors to speculate on the return on investment (ROI) of various investment
options.
Stock exchanges also serve as a source of capital formation for listed companies. Business
entities that are listed in a particular stock exchange can issue shares to the public and sell those
shares in that market.
To take part in these transactions, listed companies need to abide by the rules and requirements
of that market. The stock exchanges protect the interests of both buyers and sellers by assuring
a timely transfer of money. The participants of a stock market are required to operate within the
specified transaction limits fixed by the regulatory authority of that stock market.
Speed and transparency are vital for all stock market transactions. The companies listed in a
18
stock exchange need to provide proper guidance regarding business performance and prospects,
mergers and acquisitions, stock prices, dividends and other information at all times. Investors
make their investment decisions based on the information obtained from these companies.
How Stock Exchanges Operate:
With the help of stockbrokers, the buyers and sellers participating in a stock market carry out
their transactions. The brokers representing selling parties take their orders to the stock
exchange floor and then find brokers representing parties willing to invest in similar stocks. If
both parties agree to trade at the fixed price, the transaction takes place.
The role of stock exchanges:
Stock exchanges have multiple roles in the economy, this may include the following:-
 Raising capital for businesses.

 Mobilizing savings for investment.
 Facilitating company growth.
 Redistribution of wealth.
 Corporate governance.
 Creating investment opportunities for small investors.
 Barometer of the economy.
Pattern of Growth of Stock Exchange:
In the figure, we can see the growth of Indian Stock

Exchanges. After independence, we had only 7 stock
exchanges. The Calcutta Stock Exchange (CSE) was
the largest stock exchange in India till 1960s. In
order to promote the oderly development of the stock
market, number of stock exchanges has been
increased. Again, after the announcement of new
economic policy in 1991, the number increase to 22.
And, at present, there are 23 stock exchanges in India

– 19 regional Stock Exchanges, BSE, NSE, OCTEI
and the Interconnected Stock Exchange of India
(ICSE).
How to find a good stock?
19
There are some factors that can help predict whether a stock is good or questionable, and these
can help one to determine the best stocks for his portfolio and needs. Some of ways to identify
a good stock are mentioned below:
CAPEX or Capital Expenditure:
One way to identify a good stock is by looking at the CAPEX, or capital expenditure,
compared to other similar stocks in the same industry. Make sure that the stocks being
compared are from the same industry and that the companies are similar, otherwise the stock
analysis will be inaccurate and the stock may not be such a good deal. Consumer stocks, such
as Coca Cola and Nestle, usually have a minimum or low capital expenditure. Having a low
capital expenditure means that the company uses their operating profits for investment funding
instead of taking out loans that can have fluctuating interest rates and cost money. During an
economic recession, low CAPEX stocks are a better bet than many from heavy industries
because of the fluctuation of interest rates when the economy falls.
Reliability:
Finding a good stock also means looking at other factors; one of which is reliability. Choose
stock in a company that has been shown to be reliable and that has a high potential for growth.
Look at the price the stock is currently listed at and evaluate this price against the current
company condition and the potential for future growth. This evaluation will help you
determine whether the stock price is reasonable, which makes it a good stock, or if it is inflated
compared to the current situation and conditions.
Risk and the level of reward:
The higher the risk, the better a reward is going to be if the stock performs well. One should
determine what level of risk he is willing and can afford to take, and only choose stocks that
reflect this risk level. There are many different formulas that can be used to try and place value
on a stock, and each investor will be able to tell what formula they are most comfortable with
in determining whether a stock is good or bad.
High profit margin:
A good stock should have a high profit margin. The profit margin of a company will alert you
to vital information concerning the effectiveness of the current company management. A good
management team will be able to reduce the operating costs of a company and at the same time
increase revenue and possibly growth as well. When comparing and evaluating stocks, one
should look at those with the highest profit margins.
Any investment carries some risk, but choosing a good stock can minimize the risks of the
investment and maximize the gains one will see. One should look for stocks that have gone
down in price simply because of market conditions and not because of problems with the
management or company. With the way the stock prices have dropped in the last six months,
there are plenty of excellent stock choices available, and the prices are low simply because
almost all stock prices have fallen and many investors wanted out of the market before it could
20
crash. Some of these stocks represent a great investment opportunity because the price is good
and the company is solid.
5.5 Bombay Stock Exchange (BSE):
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now
spanning three centuries in its 133 years of existence. What is now popularly known as BSE
was established as "The Native Share & Stock Brokers' Association" in 1875.
BSE is the first stock exchange in the country which obtained permanent recognition (in 1956)
from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's
pivotal and pre-eminent role in the development of the Indian capital market is widely
recognized. It migrated from the open outcry system to an online screen-based order driven
trading system in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatised
and demutualised entity incorporated under the provisions of the Companies Act, 1956,
pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the
Securities and Exchange Board of India (SEBI). With demutualisation, BSE has two of world's
best exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.
Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
providing it with an efficient access to resources. There is perhaps no major corporate in India
which has not sourced BSE's services in raising resources from the capital market.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies and
the world's 5th in transaction numbers. The market capitalization as on December 31, 2007
stood at USD 1.79 trillion. An investor can choose from more than 4,700 listed companies,
which for easy reference, are classified into A, B, S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and
is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is
constructed on a 'free-float' methodology, and is sensitive to market sentiments and market
realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices.
The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It brings
to the investors a trading tool that can be easily used for the purposes of investment, trading,
hedging and arbitrage. SPIcE allows small investors to take a long-term view of the market.
Awards:
• The World Council of Corporate Governance has awarded the Golden Peacock Global
CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR).
• The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and
March 31 2007 have been awarded the ICAI awards for excellence in financial
reporting.
21
• The Human Resource Management at BSE has won the Asia - Pacific HRM awards for
its efforts in employer branding through talent management at work, health
management at work and excellence in HR through technology
5.6 SENSEX - The Barometer of Indian Capital Markets
BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index

composed of 30 stocks started in 01 of Jan, 1986. It consists of the 30 largest and most actively
traded stocks, representative of various sectors, on the Bombay Stock Exchange. These
companies account for around one-fifth of the market capitalization of the BSE. The base value
of the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.
At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and modify its
composition to make sure it reflects current market conditions. The index is calculated based on
a free-float capitalization method; a variation of the market cap method. Instead of using a
company's outstanding shares it uses its float, or shares that are readily available for trading.
The free-float method, therefore, does not include restricted stocks, such as those held by
company insiders.
The index has increased by over ten times from June 1990 to the present. Using information
from April 1979 onwards, the long-run rate of return on the BSE Sensex works out to be 18.6%
per annum, which translates to roughly 9% per annum after compensating for inflation.
Index Specification:
 Base Year :1978-79

 Base Index Value :100
 Date of Launch : 01-01-1986
 Method of : Launched on full market capitalization method and effective
calculation September 01, 2003, calculation method shifted to free-float
market capitalization.
 Number of scrips : 30
 Index calculation : 15 seconds
frequency
Companies Listed in the Sensex:
A list of BSE Sensex listed companies is given below which provides the full list of companies
that have been part of the BSE Sensex since its inception in 1986 (baselined to 1979).
22
(As of January 12, 2009)
Code Name Sector Market Cap Weight in

(Rs. In Crore) Index (%)
500410 ACC Housing Related 15,500.35 0.87

500103 BHEL Capital Goods 100,672.24 3.29
532454 Bharti Airtel Telecom 156,785.10 5.12
532868 DLF Universal Limited* Housing related 110,217.43 1.54
500300 Grasim Industries Diversified 23,603.36 1.65

500010 HDFC Finance 67,579.99 5.36
500180 HDFC Bank Finance 46,771.18 3.49
500440 Hindalco Industries Metal, Metal Products & 20,217.87 1.32
Mining
500696 Hindustan Lever Limited FMCG 49,804.67 2.32
532174 ICICI Bank Finance 85,589.54 7.98

500209 Infosys Information Technology 81,783.17 6.49
500875 ITC Limited FMCG 77,736.80 5.08

532532 Jaiprakash Associates Housing Related 26,524.96 1.48
500510 Larsen & Toubro Capital Goods 88,321.36 7.42
500520 Mahindra & Mahindra Transport Equipments 17,095.03 1.28
Limited
532500 Maruti Udyog Transport Equipments 23,966.53 1.12
532555 NTPC Power 162,435.65 2.27
500312 ONGC Oil & Gas 209,898.26 3.29
500359 Ranbaxy Laboratories Healthcare 16.375.36 1.07
532712 Reliance Communications Telecom 104,914.49 3.43
500325 Reliance Industries Oil & Gas 329,178.73 15.35

500390 Reliance Infrastructure Power 29,593.48 1.93
500112 State Bank of India Finance 100,976.76 4.24
500900 Sterlite Industries* Metal, Metal Products, and 18,428.34 0.95
Mining
23
524715 Sun Pharmaceutical Healthcare 26,441.43 2.34

Industries*
532540 Tata Consultancy Services Information Technology 79,355.53 1.85
500570 Tata Motors Transport Equipments 24,033.43 1.35
500400 Tata Power* Power 17,080.98 1.04
500470 Tata Steel Metal, Metal Products & 50,685.24 3.31

Mining
507685 Wipro Information Technology 62,133.50 1.16
 DLF replaced Dr. Reddy's Lab on November 19, 2007.

 Sterlite Industries replaced Ambuja Cements on July 28, 2008.
 Tata Power Company replaced Cipla Ltd. on July 28, 2008.
 Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009.
Sensex milestones:
Here is a timeline on the rise and rise of the Sensex through Indian stock market history.
• 1000, July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for the
first time and closed at 1,001 in the wake of a good monsoon and excellent corporate
results.
• 2000, January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark and
closed at 2,020 followed by the liberal economic policy initiatives undertaken by the
then finance minister and current Prime Minister Dr Manmohan Singh.
• 3000, February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000
mark in the wake of the market-friendly Budget announced by Manmohan Singh.
• 4000, March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark and
closed at 4,091 on the expectations of a liberal export-import policy. It was then that the
Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.
• 5000, October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark as
the Bharatiya Janata Party-led coalition won the majority in the 13th Lok Sabha
election.
• 6000, February 11, 2000 - On February 11, 2000, the information technology boom
helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.
24
• 7000, June 21, 2005 - On June 20, 2005, the news of the settlement between the
Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy,
Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000
points for the first time.
• 8000, September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's

benchmark 30-share index – the Sensex - crossed the 8000 level following brisk buying
by foreign and domestic funds in early trading.
• 9000, December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch
9000.32 points during mid-session at the Bombay Stock Exchange on the back of
frantic buying spree by foreign institutional investors and well supported by local
operators as well as retail investors.
• 10,000, February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points
during mid-session. The Sensex finally closed above the 10,000-mark on February 7,
2006.
• 11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched a
peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first
time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000
points as robust foreign fund inflows and a move by government towards greater capital
account convertibility.
• 12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched a
peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first
time in the wake of massive buying from mutual funds around Rs. 3400 cr. in just 19
trading sessions, favourable credit policy.
• 13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 for the
first time. It touched a peak of 13,039.36 and finally closed at 13,024.26. Sensex drivers
were fund infusion from market players, falling oil prices, strong second quarter results
from technology and banking companies, robust growth in infrastructure sector.
• 14,000, December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000 in the
wake of strong FII inflow and healthy corporate earnings.
• 15,000, July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000 mark.
• 16,000, September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000
mark.
• 17,000, September 26, 2007 - The Sensex on September 26, 2007 crossed the 17,000
mark for the first time.
• 18,000, October 9, 2007 - The Sensex on October 09, 2007 crossed the 18,000 mark
for the first time.
25
for the first time.
for the first time. The main drivers were strong FII buying coupled with short covering
led to sharp up move. Registration of FIIs and Participatory Note issue clarification has
put momemtum into sensex.
• 21,000, Jan 08, 2008 - The Sensex on January 08, 2008 touched all time peaks of
21078 before closing at 20873 due to expectation of excellent quaterly result and strong
forward momemtum.
Graphical Presentation:
May 2009
On May 18, 2009, the sensex surged 2110.79 points from the previous closing of 12174.42 this
leading to the suspension of trade for the whole day. This event created history in Dalal Street,
by being the first ever time that trade had been suspended for an increase in value. This rally is
primarily due to the victory of the UPA in the 15th General elections.
Sensex falls:
The top 18 single-day falls of the Sensex have occurred on the following dates:
 January 21, 2008 ---------1,408.35 points
 Oct 24, 2008---------------1070.63 points
 March 17, 2008 --- -------951.03 points
 January 22, 2008 ---------857 points
 February 11, 2008 --------833.98 points
26
 May 18, 2006 --------------826 points

 October 10,2008 --------- 800.10 points
 March 13, 2008 --- -------770.63 points
 December 17, 2007 ----- 769.48 points
 January 7,2009 ------------749.05 points
 March 31, 2007 ---------- 726.85 points
 October 06, 2008 ---------724.62 points
 October 17, 2007 ---------717.43 points
 September 15, 2008 ------710.00 points
 January 18, 2007 ----------687.82 points
 November 21, 2007 ------678.18 points
 August 16, 2007 ----------642.70 points
 June 27, 2008 -------------600.00 points
Major crashes since 2000:
May 2006
On May 22, 2006, the Sensex plunged by 1100 points during intra-day trading, leading to the
suspension of trading for the first time since May 17, 2004. The volatility of the Sensex had
caused investors to lose Rs 6 lakh crore ($131 billion) within seven trading sessions. The
Finance Minister of India, P. Chidambaram, made an unscheduled press statement when
trading was suspended to assure investors that nothing was wrong with the fundamentals of the
economy, and advised retail investors to stay invested. When trading resumed after the
reassurances of the Reserve Bank of India and the Securities and Exchange Board of India
(SEBI), the Sensex managed to move up 700 points, still 450 points in the red.
The Sensex eventually recovered from the volatility, and on October 16, 2006, the Sensex
closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76. This was a result of
increased confidence in the economy and reports that India's manufacturing sector grew by
11.1% in August 2006.
Effects of the subprime crisis in the U.S. :
On July 23, 2007, the Sensex touched a new high of 15,733 points. On July 27, 2007 the
Sensex witnessed a huge correction because of selling by Foreign Institutional Investors and
global cues to come back to 15,160 points by noon. Following global cues and heavy selling in
the international markets, the BSE Sensex fell by 615 points in a single day on August 1, 2007.
January 2008
In the third week of January 2008, the Sensex experienced huge falls along with other markets
around the world. On January 21, 2008, the Sensex saw it’s highest ever loss of 1,408 points at
the end of the session. The Sensex recovered to close at 17,605.40 after it tumbled to the day's
low of 16,963.96, on high volatility as investors panicked following weak global cues amid
fears of a recession in the US.
27
The next day, the BSE Sensex index went into a free fall. The index hit the lower circuit
breaker in barely a minute after the markets opened at 10 AM. Trading was suspended for an
hour. On reopening at 10.55 AM IST, the market saw its biggest intra-day fall when it hit a low
of 15,332, down 2,273 points. However, after reassurance from the Finance Minister of India,
the market bounced back to close at 16,730 with a loss of 875 points.
Gigantic drops of the SENSEX in a day
Of the six major falls of sensex in a day, three can be attributed to political developments and
rests to scams. Political stability and scams have, to a large extent, influenced the market
investor sentiment ---- domestic and international.
Date Fall (points) Culprits

th
28 April 1992 570 Harshad Mehta involved in scam.
12th May 1992 333 Full effect of the scam.
9th May 1992 327 National Housing Bank involved in a
scam.
31st March 1997 303 Congress withdraws support to Deve
Gowda’s government
17th April 1999 246 Vajpayee’s government falls.
17th May 2004 894.31 Defeat of the BJP-led NDA
government.
6th July, 2009 869 2009-10 Union Budget.
5.7 Major Indian Stock Market Reforms:
Securities and Exchange Board of India (SEBI):
On 31st March 1992, the SEBI was established as an autonomous and statutory body. The SEBI
is the regulatory authority to oversee the new issues, protect the interests of investors, promote
the development of the capital market and regulate the working of stock exchanges. It has
initiated a number of measures in these directions such as registration of intermediaries, strict
disclosure norms, regulations on insider trading and inspection of the functioning of the stock
exchanges and mutual funds, etc.
Over-the-Counter Exchange of India (OTCEI):
28
Over the Counter Exchange of India has been promoted jointly by ICICI, UTI, IDBI, IFCI,
GIC, LIC, SBI, Capital Markets, and Canbank Financial Servics. It has been registered as a
stock exchange with the SEBI and has commenced its operations from 6th October 1992. Its
main aim is to provide small and medium companies an access to capital market in order to
raise capital in a cost-effective manner. It is a regulatory body which supervises monitors and
controls the trading activity at OTC (over the counter). The OTCEI operates at Mumbai with
regional windows at other metrpolitan cities and representative offices in a few major cities.
5.8 National Stock Exchange (NSE):
With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock
market trading system on par with the international standards. On the basis of the
recommendations of high powered Pherwani Committee, the National Stock Exchange was
incorporated in 1992 as a tax-paying company unlike other stock exchanges in the country by
Industrial Development Bank of India, Industrial Credit and Investment Corporation of India,
Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks
and others.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in
April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in
June 1994. The Capital Market (Equities) segment commenced operations in November 1994
and operations in Derivatives segment commenced in June 2000.
The NSE was incorporated with the following objectives:-
 To establish a nationwide trading facility for equities, debt intruments and hybrids.
 To ensure all investor all over the country equal access through an appropiate
communication network.
 To provide a fair, efficient, and transparent securities market to investors through an
electronic trading system.
 To enable shorter settlement cycles and book entry settlement system.
 To meet the current international standards of securities markets.
The exchange is professionally managed in that the ownership and managemet of the NSE are
completely separated from the rightto trade on the exchange. In order to upgrade the
professional standards of the market intermediaries, the exchange lays stress on factors such as
capital adequacy, corporate structure, track record, and educational experience.
Trading at NSE can be classified under two broad categories:
 Wholesale debt market and

 Capital market.
Wholesale debt market operations are similar to money market operations - institutions and
corporate bodies enter into high value transactions in financial instruments such as government
securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
29
There are two kinds of players in NSE:
 Trading members and

 Participants.
Recognized members of NSE are called trading members who trade on behalf of themselves
and their clients. Participants include trading members and large players like banks who take
direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading mechanism which
adopts the principle of an order-driven market. Trading members can stay at their offices and
execute the trading, since they are linked through a communication network. The prices at
which the buyer and seller are willing to transact will appear on the screen. When the prices
match the transaction will be completed and a confirmation slip will be printed at the office of
the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:
 NSE brings an integrated stock market trading network across the nation.
 Investors can trade at the same price from anywhere in the country since inter-
market operations are streamlined coupled with the countrywide access to the
securities.
 Delays in communication, late payments and the malpractice’s prevailing in the
traditional trading mechanism can be done away with greater operational efficiency
and informational transparency in the stock market operations, with the support of
total computerized network.
Unless stock markets provide professionalised service, small investors and foreign investors
will not be interested in capital market operations. And capital market being one of the major
sources of long-term finance for industrial projects, India cannot afford to damage the capital
market path. In this regard NSE gains vital importance in the Indian capital market system.
NSE Milestones
 November 1992 • Incorporation.

 April 1993 • Recognition as a stock exchange.
 May 1993 • Formulation of business plan.
 June 1994 • Wholesale Debt Market segment goes live.
 November 1994 • Capital Market (Equities) segment goes live.
 April 1995 • Establishment of NSCCL, the first Clearing Corporation.

 June 1995 • Introduction of centralised insurance cover for all trading
30
members.
 July 1995 • Establishment of Investor Protection Fund.
 October 1995 • Became largest stock exchange in the country.
 April 1996 • Commencement of clearing and settlement by NSCCL.
 April 1996 • Launch of S&P CNX Nifty.
 June 1996 • Establishment of Settlement Guarantee Fund.
• Setting up of National Securities Depository Limited, first
 November 1996
depository in India, co-promoted by NSE.
 November 1996 • Best IT Usage award by Computer Society of India.
• Commencement of trading/settlement in dematerialised
 December 1996
securities.
 December 1996 • Dataquest award for Top IT User.
 December 1996 • Launch of CNX Nifty Junior.
 February 1997 • Regional clearing facility goes live.
 November 1997 • Best IT Usage award by Computer Society of India.
• Promotion of joint venture, India Index Services &
 May 1998
Products Limited (IISL).
 May 1998 • Launch of NSE's Web-site: www.nse.co.in.
• Launch of NSE's Certification Programme in Financial
 July 1998
Market.
 August 1998 • CYBER CORPORATE OF THE YEAR 1998 award.
• Launch of Automated Lending and Borrowing
 February 1999
Mechanism.
 October 1999 • Setting up of NSE.IT.

 January 2000 • Launch of NSE Research Initiative.
 February 2000 • Commencement of Internet Trading.
 June 2000 • Commencement of Derivatives Trading (Index Futures).
 September 2000 • Launch of 'Zero Coupon Yield Curve'.
• Launch of Broker Plaza by Dotex International, a joint
 November 2000
venture between NSE.IT Ltd. and i-flex Solutions Ltd.
 December 2000 • Commencement of WAP trading.
31
 June 2001 • Commencement of trading in Index Options.

• Commencement of trading in Options on Individual
 July 2001
Securities.
• Commencement of trading in Futures on Individual
 November 2001
Securities.
 December 2001 • Launch of NSE VaR for Government Securities.
 January 2002 • Launch of Exchange Traded Funds (ETFs).
• NSE wins the Wharton-Infosys Business Transformation
 May 2002
Award in the Organization-wide Transformation category.
 October 2002 • Launch of NSE Government Securities Index.
 January 2003 • Commencement of trading in Retail Debt Market .
 June 2003 • Launch of Interest Rate Futures.
 August 2003 • Launch of Futures & options in CNXIT Index .
 June 2004 • Launch of STP Interoperability.
 August 2004 • Launch of NSE’s electronic interface for listed companies.
• ‘India Innovation Award’ by EMPI Business School, New
 March 2005
Delhi.
 June 2005 • Launch of Futures & options in BANK Nifty Index.
 December 2006 • 'Derivative Exchange of the Year', by Asia Risk magazine.
 January 2007 • Launch of NSE – CNBC TV 18 media centre.
 March 2007 • NSE, CRISIL announce launch of IndiaBondWatch.com
 June 2007 • NSE launches derivatives on Nifty Junior & CNX 100.
 October 2007 • NSE launches derivatives on Nifty Midcap 50.
• Introduction of Mini Nifty derivative contracts on 1st
 January 2008
January 2008.
• Introduction of long term option contracts on S&P CNX
 March 2008
Nifty Index.
 April 2008 • Launch of India VIX.
 August 2008 • Launch of Currency Derivatives.
32
Index-based Market-wide Circuit Breakers:
An index based market-wide circuit breaker system applies at three stages of the index
movement either way at 10%, 15% and 20%. These circuit breakers bring about a coordinated
trading halt in trading on all equity and equity derivatives markets across the country. The
breakers are triggered by movements in either Nifty 50 or Sensex, whichever is breached
earlier.
 In case of a 10% movement in either of these indices, there would be a one-hour market
halt if the movement takes place before 1:00 p.m. In case the movement takes place at
or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case
movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level
and market would continue trading.
 In case of a 15% movement of either index, there should be a two-hour halt if the
movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00 p.m.
but before 2:00 p.m., there should be a one-hour halt. If the 15% trigger is reached on or
after 2:00 p.m. the trading should halt for remainder of the day.
 In case of a 20% movement of the index, trading should be halted for the remainder of
the day.
5.9 FOREIGN INSTITUTIONAL INVESTMENTS AND THE INDIAN

STOCK MARKET:
An important feature of the 1990s was the participation of FIIs in the stock market.FIIs was
allowed to participate in the Indian stock Market in September 1992. They have become active
investors since August 1993. As of 31st July, 2009, there are 1,679 FIIs registered with SEBI.
FIIs Flows:
From the graph, we can see the
substantial increase in FIIs
investment during the years
between 2000 and 2006. FII
investment in India has come in
waves. The first wave of FII
came in 1993-94 when the
stock markets were opened up
for foreign investors. FII net
flow touched Rs. 6,791 crore in
2000. Then a large number of
FIIs arrived with ‘emerging
market’ funds in 2000-01
wherein the FII net investment
touched a high of Rs. 13,084
crore. However, the FII fund
flow declined tremendously in
the year 2002. It came down to Rs. 3,555 crore. The major reasons for the decline in their
33
investment were the dismal performance of the Indian stock market and the slow pace of
reforms.The third wave which came in 2003 brought in new FIIs such as Hedge funds,
university funds and development market funds to encash India’s growth story. The net FII
inflow touched a record Rs. 30,893 crore in 2003 and Rs. 37,183 crore in 2004 with most of the
investment in promising mid-cap stocks. Since 2004, a rally in mid-cap shares raised the
market capitalisation ratio thereby benefitting FIIs and increasing their interest in Indian stock.
This increased investment was on the account of strong macro-economic fundamentals,
abolition of long-term capital gains tax, etc.
Most FIIs took advantage of depressed prices increased their stakes in frontline Sensex stocks
such as Infosys, HLL, Reliance, ITC, etc. FIIs increase their activity whenever there is
downturn in the stock market. They identified and picked up the old economy Indian
companies which were being traded at a discount and actively bought those shares.
Sectoral Holding of FIIs:
Structural Reforms and Impact of FIIs on the Capital Market:
India has been in the forefront of utilizing technology to enhance its stock market performance.
Both the stock exchanges’ (BSE and NSE) web sites provide a real-time update of various
indices, streaming quotes of stocks, the news updates, screen-based order matching system.
Further reforms on practices like rolling settlements, trade guarantee, demat settlement and
derivative trading have certainly added depth (volume of a particular stock) and breadth
(number of stocks traded) to the market.
Change in the Pattern of Equity Holding of Sensex Listed Companies:
Equity Holding Pattern of Sensex Companies

(In percentage) %
Promoters Institutional Mutual Banks, FIs, FIIs Others
Share Investor Share Fund & Insurance share
UTI share cos share
34
March 32.42 35.81 6.67 11.62 17.52 31.77

-05
March 31.66 35.84 5.38 13.91 16.55 32.50
– 06
March 34.49 36.54 4.46 10.27 21.63 28.97
– 07
March 38.28 35.88 3.46 9.67 22.75 25.84
– 08
Source: CMIE Prowees Database
The growing significance of FIIs in the stock market can be observed from the share of FIIs in
the equity holding of the Sensex companies, which has increased from 17.52% in March 2005
to 22.75% in March 2008. On the other hand, the domestic institutions have continuously
divested their share over the same period. Despite the increase in the share of FIIs the
combined share of the domestic institutions exceeds that of FIIs holding. Hence the FIIs alone
cannot be squarely blamed for the destabilizing developments in the Sensex. The magnitude
and the duration of FIIs involvement in the stock market has definitely created opportunities
and scope for the domestic players to grow to strength in terms of depth and breadth.
The total proportion of households investing in equities or in mutual funds has been around
9%. Indian institutions of long-term finance like provident and pension funds do not invest in
equities. This is on account of the prevailing legislation as well as the opposition of workmen
to equity investments. While insurance companies do invest a portion of their funds in equities,
the penetration of insurance in India is at a very low level, limiting the availability of funds for
equity investments. Thus, a lot of domestic capital is flowing into unproductive uses like gold
and in financing the fiscal deficit of the government.
6. Market Trend:
Almost every day in the investing world, we used to hear the terms "bull" and "bear" to
describe market conditions. As common as these terms are, however, defining and
understanding what they mean is not so easy. Because the direction of the market is a major
force affecting one’s portfolio, it's important to know exactly what the terms bull and bear
market actually signify, how they are characterized and how each affects.
Bull and Bear- these two terms are constantly buzzing around the investing world. At the same
time, because the market is determined by investors' attitudes, these terms also denote how
investors feel about the market and the ensuing trend.
Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained
increase in market share prices. In such times, investors have faith that the uptrend will
continue in the long term. Typically, the country's economy is strong and employment levels
are high.
On the other hand, a bear market is one that is in decline. Share prices are continuously
35
dropping, resulting in a downward trend that investors believe will continue in the long run,
which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow
down and unemployment will rise as companies begin lying off workers.
Where Did the Terms Come from?

The origins of the terms "bull" and "bear" are unclear, but here are two of the most common
explanations:
1. The bear and bull markets are named after the way in which each animal attacks its
victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on
the other hand, like the market that bears its name, will swipe its paws downward upon
its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents
when it was popular to put bulls and bears into the arena for a fight match. Matches
using bulls and bears (whether together or gains other animals) took place in the
Elizabethan era in London and were also a popular spectator sport in ancient Rome.
2. Historically, the middlemen who were involved in the sale of bearskins would sell skins
that they had not yet received and, as such, these middlemen were the first short sellers.
After promising their customers to deliver the paid-for bearskins, these middlemen
would hope that the near-future purchase price of the skins from the trappers would
decrease from the current market price. If the decrease occurred, the middlemen would
make a personal profit from the spread between the price for which they had sold the
skins and the price at which they later bought the skins from the trappers. These
middlemen became known as bears, short for "bearskin jobbers", and the term stuck for
describing a person who expects or hopes for a decrease in the market.
Characteristics of a Bull and Bear Market:
Although we know that a bull or bear market condition is marked by the direction of stock
prices, there are some accompanying characteristics of the bull and bear markets that investors
should be aware of. These can be mentioned as below:
 Supply and Demand for Securities- In a bull market, we see strong demand and weak
supply for securities. In other words, many investors are wishing to buy securities while
few are willing to sell. As a result, share prices will rise as investors compete to obtain
available equity. In a bear market, the opposite is true as more people are looking to sell
than buy. The demand is significantly lower than supply and, as a result, share prices
drop.
 Investor Psychology - Because the market's behavior is impacted and determined by

how individuals perceive that behavior, investor psychology and sentiment are
fundamental to whether the market will rise or fall. Stock market performance and
investor psychology are mutually dependent. In a bull market, most everyone is
interested in the market, willingly participating in the hope of obtaining a profit. During
a bear market, on the other hand, market sentiment is negative as investors are
beginning to move their money out of equities and into fixed-income securities until
there is a positive move. In sum, the decline in stock market prices shakes investor
confidence, which causes investors to keep their money out of the market - which, in
turn, causes the decline in the stock market.
36
 Change in Economic Activity - Because the businesses whose stocks are trading on the
exchanges are the participants of the greater economy, the stock market and the
economy are strongly connected. A bear market is associated with a weak economy as
most businesses are unable to record huge profits because consumers are not spending
nearly enough. This decline in profits, of course, directly affects the way the market
values stocks. In a bull market, the reverse occurs as people have more money to spend
and are willing to spend it, which, in turn, drives and strengthens the economy.
6.1 BULL MARKET:
Definition: A prolonged period in which investment prices rise faster than their historical
average.
A bull market refers to when the prices of stocks have gone up steadily over an extended time
period. A bull market means a market that is going up instead of down. Normally during a bull
market, the economy of the country is stable and strong, and unemployment is low. The
assumption by the investors is usually that the market will continue the upward swing. The
opposite of a bull market is a bear market. A bull market can be described by some
characteristics that occur, and investors should watch these characteristics closely to determine
what trades to make. It is a financial market of a group of securities in which prices are rising
or are expected to rise. The term "bull market" is most often used to refer to the stock market,
but can be applied to anything that is traded, such as bonds, currencies and commodities.
A bull market tends to be associated with increasing investor confidence, motivating investors
to buy in anticipation of future price increases and future capital gains. In describing financial
market behavior, the largest group of market participants is often referred to, metaphorically, as
a herd. This is especially relevant to participants in bull markets since bulls are herding
animals. A bull market is also sometimes described as a bull run.
Bull markets can happen as a result of an economic recovery, an economic boom, or investor
psychology. The longest and most famous bull market is the one that began in the early 1990s
in which the U.S. equity markets grew at their fastest pace ever. In simple, bull-market refers to
a financial market of a group of securities in which prices are rising or are expected to rise. The
term "bull market" is most often used to refer to the stock market, but can be applied to
anything that is traded, such as bonds, currencies and commodities. Bull markets are
characterized by optimism, investor’s confidence and expectations that strong results will
continue.
Why is it called a Bull Market?
37
The term "bull" is used to describe the market, because bulls attack by pushing their horns out
and up. Hence the thrusting motion up resembles the upward move of the markets. Also, when
bulls run together, they do so without looking back and go full steam ahead. This is also the
mentality of the markets as traders and speculators trip over themselves attempting to jump on
the band wagon for quick gains.
Features of Bull market:
A bull market is not simply stocks that are on the rise in price. There are some other factors that
can affect the type of market and how trades are being done as well, and this is also true in a
bear market or any other market type.
 One of these factors is the level of supply and demand for securities for trading. A
bull market will exhibit signs of a strong demand for securities against a weak supply
for them. Many traders and investors want to purchase securities, but most traders and
investors do not want to sell, and this will cause the market price to go up in response.
Because investors want securities but they are in short supply, the investors are willing
to pay a higher price for them, and this is what causes the stock price to rise.
 Another factor concerning a bull market is the psychology involved. The psychology of
the investors is an important factor, because the behavior of the market is based in part
on the behavior and mindset of the investors. The performance of the stock market and
the psychology of the investors are dependent on each other, and the thoughts and fears
of investors will determine whether the market goes up or down. This is a fundamental
principle, and the psychology of investors will determine how the market reacts.
 During a bull market investors want to buy, because the price is going up, and investors
are confident that buying stock can be profitable if this trend continues. A bull market
means plenty of investors trying to buy and share in the wealth in the hopes that the
market prices continue to rise. Investors will pull money out of fixed income securities
that pay less, and invest in the stock market instead.
 Another factor that plays a part in a bull market, or any market fluctuations and trading
activities, is the economic activity. There is a very strong link between the economy
and the stock market. Businesses are the base for the stocks that are traded on the
market, and the economy has a huge effect on these businesses.
 In a bull market, the economy is strong and stable, and economic growth and activity
are high. Consumer spending is high, because people have extra money, and this
strengthens the economy and raises the market price of the stocks. This is because
businesses are making profits and can afford to expand, leading to even more potential
profits.
 A bull market can be risky, however, because eventually what goes up must come
down, and the volume of trading in a bull market is high. This can have an effect known
as the bubble effect, because stocks rise so high they become overvalued, and
eventually the bubble will burst and the market can collapse swiftly.
38
Apart from the above noted points, there are another five major characterstics of Bull Market.
 Economic Growth: Clearly the economy matters a whole lot to the stock market. If we
are in a period of consistent economic growth there is good chance we will either be in
a Bull market, or one will be starting shortly. The whole basis of how a stock is valued
is based on how well a company doing economically, so while some companies may do
better than others in a strong economy the market as a whole should be very strong.
 Less Volatility: Volatility tends to be a friend of a bear market and lack of volatility
tends to lead to higher prices. If we step back and watch the market we’ll notice that in
a down market the daily swings tend to be much larger than in an up market. In a Bull
market, things are more stable and under control and the gains are generally small and
steady.
 Reasonably Amount of certainty: Uncertainity is one of the biggest allies of Bear
market and one of the biggest enemies of Bull Market. As long as market participant
can feel pretty comfortable that estimates at blue chip companies are accurate and
economists forecasts are pretty much in line then the market typically behaves well.
 Strong Market Breadth: During a bull market there is strength throughout many
market sectors. Typically the volume to the upside will be much stronger than that to
the downwards. In a bear market rally the move is typically from a smaller number of
stocks and breadth isn’t so strong.
 Strong corporate Balance sheets: It is very important to have a large amount of
companies with strong corporate balance sheets. Strong Balance sheets also reward
investors with a nice dividend, which is always a good perk.
Existence Period of Bull market:
No bull market can continue to exist for a very long period, as the prices can’t raise infinitly.
After a certain point prices has to go down. The Bull markets lasts generally for a few months
and in these months high volume of trading takes place in bull markets. In the Bull market, Bull
is the investor who expects price level to rise and buys a type of security or commodity in hope
of earning high profit by reselling it in the future when the price rise will takes place.
Factor responsible for Bull Market:
There has been a sharp rise in the index in the last year as the sensex moved from a level of
15000 to 20000 in just four months. Again SENSEX, was in a bull run for almost five years
from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another
notable and recent bull market was in the 1990s when the U.S. and many other global financial
markets rose rapidly.
The following were the main reasons for this sudden rise of sensex.
Higher GDP Growth: The Indian economy is rising in full swing. The Gross Domestic
Product (GDP) growth for last two years was over 8% and 9% respectively. It was expected to
rise at the rate of 8.5% over next couple of years. Corporate revenues had notched a 30-plus %
39
rise in revenues for nearly last five years. The domestic retail demand continued to be robust.
All these led to firm belief of investors in the Indian growth story.
Continuous Fund flows: Foreign funds have bought a net 16.2 billlion dollars into the bourses
till October 10, 2007. This is on the back of investment of over $10 billion for 2005 and over
$14 billion for 2007. Over the last few years, Foreign Institutional Investors (FIIs) have been
investing into India very heavily.
Apart from FIIs, even the Non-Residents Indians (NRIs) have been investing highly into the
Indian Equity markets. According to the RBI data, annual inflow of NRI deposits into the
country for the year 2006-07 stood at $3.9billion against $2.8 billion in the year 2005-06.
About 46% of this money was invested into the shares. According to the recently published
Merril Lynch-Capegemini Asia-Pacific Wealth Report, NRI segment is emerging as a niche
segment in the HNI category. By Dec. 31, 2007 net equity investments of NRIs were to the
tune of Rs. 27500 crores.
Strong Book orders: The order books of Indian companies especially the infrastructure and
related industries have been very strong. The companies like Larsen & Turbo, Punj Loyd,
Simplex Infra, Patel Engineering, etc, have the orders worth up to four times their current
annual sales. This has led to higher confidence of investors into these industries.
Commitment to reform: Despite the pressures from its Left allies, the UPA Government at
the centre has shown its commitment towards reforms. Steps taken to stick to fiscal targets,
opening up of the retails sector and aviation sectors to foreign investment, etc. have boosted the
confidence of foreign investors in the Indian economy. The government has also stepped up its
efforts in the direction of divestment and privatisation.
Bulky Forex Reserves: The Forex reserve of India is ballooning. It has already crossed the
mark of $250 billion and is heading towards achieving the feat of $300 billion. This promoted
the International Credit Rating agencies to upgrade India’s credit rating in foreign currency.
Stable Government: The determinant of growth for an economy is to have an efficient and
stable government that really works. There should be continuity in political sphere because if
public policies go on changing more frequently, economic progress cannot continue, rather
private and public investment will be discouraged. So, the existence of UPA government for
second consecutive time is creating favourable condition for the Indian Stock market.
Other factors: Apart from the above-noted factors, there are some important factors. These
may include high GDP growth rate, Good crops, Good rainfall, Better demand, Stability in
International market, higher cash flow, etc.
Bull Market Strategy:
In a bull market, the ideal thing for an investor to do is take advantage of rising prices by
buying early in the trend and then selling them when they have reached their peak. (Of course,
40
determining exactly when the bottom and the peak will occur is impossible.) On the whole,
when investors have a tendency to believe that the market will rise (thus being bullish), they are
more likely to make profits in a bull market. As prices are on the rise, any losses should be
minor and temporary. During the bull market, an investor can actively and confidently invest in
more equity with a higher probability of making a return.
So, to gain highest level of profits an investor in the bull market should buy early in the upward
trend of prices and should sell when the price level reaches the peak. But, it is really tough to
guess the peak of price level, after which the prices will fall. Though, it is more likely for the
investors to earn more profits rather than suffering from loss in a Bull market as are on the rise.
Even if there are losses they are oviously negligible and temporary. In a Bull Market, more
volume of investment raises the chances of good returns. And, a good understnding of long-
term market trend can take the level of returns to a new high.
There is no sure way to predict market trends, so investors should invest their money based on
the quality of the investments. At the same time, however, one should have an understanding of
long-term market trends from a historical perspective. Because, both bear and bull markets will
have a large influence over investments. So, one should take time to determine what the market
is doing when making an investment decision. However, in the long term, the market has
posted a positive return.
6.2 BEAR MARKET:
Bear market refers to a prolonged period in which investment prices fall, accompanied by
widespread pessimism. If the period of falling stock prices is short and immediately follows a
period of rising stock prices, it is instead called a correction. Bear markets usually occur when
the economy is in a recession and unemployment is high, or when inflation is rising quickly.
The most famous bear market in U.S. history was the Great Depression of the 1930s.
The term Bear Market refers to a declining or poor state of the market or trading group, usually
a stock market, in which consumer confidence and financial expectations are on a decline and
the market continues to lose value, usually at an average loss of 15% to 20% in one or more
index over a 12 month period.
Bear Markets get their name from the fighting techniques of bears. When in danger, bears will
stand on the hind legs and swipe down with their front paws. This downward movement is used
as a metaphor for the market trends. In addition, like the fast pace of the bear's swing, bear
markets traditionally define periods of time in which there is a substantial decline in stock
values. Unlike Corrections that occur over short periods of time, however, bear markets are
longer-lived with a greater loss.
Investors usually sell large quantities of shares during bear markets, contributing to the rising
pessimism and fear that accompanies large downturns in the stock indexes. These types of
scenarios usually perpetuate the decreasing value of stocks, causing more fear and even more
sales. Historically, bear markets have been the cause of major economic problems such as the
1929 Wall Street Crash and the energy crisisin the 1970s.
41
Some Bear Market Investing Strategies:
It goes without saying that the skills required to make money in the stock market are very
different depending upon whether the market is rising or falling.
These strategies include:-
 Flight to safety. If markets are choppy and volatile and the general trend is downwards,
why be in the market? Why not, instead, sell a worthwhile percentage of holdings and
move the money into either cash or bonds (medium and long term government or
corporate debt). As and when the market seems to have settled, and hopefully, there is
some value to be found, assets can be repurchased.
 Buy defensive assets. In every phase of the business cycle, there are some assets which
rise in price whilst others are falling. This is also the case in the stock market. Some
sectors will rise whilst the market generally is falling. It is therefore possible to stay in
the market and make returns.
 Buy units in a 'bear fund'. Some mutual funds are designed with downward market
movements in mind. These funds often show very poor returns as the stock market
rises. In long bull runs, ownership of these funds can be justified as portfolio
diversification, but is more likely to be very costly!
 Trade in the market. An agressive bear market investing strategy is to actively profit
from the price falls. Historically, this is known as "short selling" or "going short". The
process essentially involves the trader selling shares which they do not actually own.
The hope is that when settlement day comes, the shares can be bought back in the
market at a lower price and the trader will make a profit from the difference in prices.
In a bear market, however, the chance of losses is greater because prices are continually losing
value and the end is not often in sight. Even if you do decide to invest with the hope of an
upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the
profitability will be found in short selling or safer investments such as fixed-income securities.
An investor may also turn to defensive stocks, whose performances are only minimally affected
by changing trends in the market and are therefore stable in both economic gloom and boom.
These are industries such as utilities, which are often owned by the government and are
necessities that people buy regardless of the economic condition.
Factors Responsible For Bear Market:
The bear market is the interval in the capital market characterized by falling prices for
securities. It is a period when most of the prognosis of stockbrokers and experts are thrown into
winds and are torn into shreds. We should remember that there will always be a bull and bear
market as long as the forces of demand and supply continue in the capital market. Some major
factors responsible for Bear market are explained below:
 Massive profit taking:
42
Profit taking is the name of the game; stock traders generally look forward to selling off
their stocks once their objective for buying into a stock is achieved, but when this action
is carried out en masse it can trigger off a bearish session. During the bull market stock
traders take advantage to sell of their stocks, the massive shedding will eventually have
its toll, so watch out when you observe there is massive effort by stock traders to sell
their stocks, know the bear market will come knocking.
 Active and prolong primarymarket activities:
The primary market is the other half of the secondary market, both markets function in
diverse ways. The primary market is where the vast majority of investors do business,
the reason is not farfetched; it is an all comers market. For this reason whenever there is
prolong activities in the primary market, in other word, if there are so many initial
public offerings and private offerings, investors will channel their funds to the primary,
sometimes they may even withdraw their funds, the effect there will be more sellers in
the secondary in the secondary market than buyers, supply will outperform demand
thereby driving down the prices of shares.
 Massive panic selling by emotion driven investors:
One of the feature of a bearish a bearish market, is the reaction of emotion and
sentiment driven investors. The bearish season over the years from my experience
analyzing and trading stocks have always beaten uninformed investors who have not
imbibe the entry and exit strategy that I know has most of the time protected wise and
seasoned stock traders. When the vast majority observes that the prices of stocks are
rallying down they react by selling off their which affects the stability of the secondary
market.
 Subprime Crisis:
It all started with the subprime crisis in the U.S. When the housing market was booming
in the U.S, banks sold housing loans to those who were undeserving, generally known
as subprime borrowers, at higher interest rates. When the housing markets declined in
the U.S., the defaults from such borrowers started increasing and the lending institutions
were facing huge losses. This loss is estimated to over $100 billion. A couple of
companies have also filed for bankruptcy due to heavy losses. Through, it does not have
any direct impact on the Indian market, it affected indirectly. As many of these lenders
43
have also invested in the Indian markets, they started selling their shares in order to
maintain liquidity and keep their companies running.
 Higher Sustained Oil prices:
The crudeprices are on the upward movement for last two years. After touching a high
of $90 per barrel, the prices are hovering around $70. This sustained high price of crude
has been affecting the economy as India is heavily dependent on import of crude oil.
The pressure on the crude refining companies is mounting and they are bleeding on
losses.
7. Volatility:
Volatility of a stock measures the frequency with which changes in its market price take place
over a period of time. Again, volatility in the market is a function of information,
misinformation and sometimes lack of information. In other words, Stock market volatility
indicates the degree of price variation between the share prices during a particular period. A
certain degree of market volatility is unavoidable, even desirable, as the stock price fluctuation
indicates changing values across economic activities and it facilitates better resource allocation.
But frequent and wide stock market variations cause uncertainty about the value of an asset and
affect the confidence of the investor. The risk averse and the risk neutral investors may
withdraw from a market at sharp price movements. Extreme volatility disrupts the smooth
functioning of the stock market.
Inter–day Volatility: The variation in share price return between the two trading days is called
inter–day volatility. Standard deviation is used to calculate inter–day volatility.
Intra–day Volatility: The variation in share price return within the trading day is called intra–
day volatility. It indicates how the indices and shares behave in a particular day.
44
Return: Return is the motivating factor that induces the investors to invest money in shares.
Return means the profit earned as a result of rise in share prices. Return helps the investor to
compare the benefits available in the alternative investment avenue.
Volatility in Share prices:
Year wise descriptive statistics for Nifty and Sensex:
TABLE 1
Year Name of the Minimum index Maximum index Daily average

indices level level return
1998-1999 Nifty 808.7 1212.75 0.0029%
Sensex 2764.16 4280.96 0.1163%
1999-2000 Nifty 931 1756 0.1561%
Sensex 3245.27 5933.56 0.1411%
2000-2001 Nifty 1124.7 1624.65 -0.0944%
Sensex 3540.65 5541.54 -0.1379%
2001-2002 Nifty 854.2 1198.45 0.0032%
Sensex 2600.12 3742.07 -0.0113%
2002-2003 Nifty 922.7 1146.5 -0.0524%
Sensex 2834.41 3512.55 -0.0557%
2003-2004 Nifty 924.3 1982.15 0.2444%
Sensex 2924.03 6194.11 0.2383%
2004-2005 Nifty 1388.75 2168.95 0.0681%
45
Sensex 4505.16 6915.09 0.0492%

2005-2006 Nifty 1902.5 3418.95 0.2075%
Sensex 6134.86 11307.04 0.2158%
2006-2007 Nifty 2632.8 4224.25 0.0466%
Sensex 8929.44 14652.09 0.0500%
2007-2008 Nifty 3633.6 6287.85 0.0853%
Sensex 12455.37 20873.33 0.0919%
Analysis:
The daily average return of the Nifty and the Sensex in the year 1998–99 was 0.00294 per cent
and -0.02482 per cent respectively. The Nifty had positive return whereas the Sensex had
negative return. The pressure of economic sanctions following detonation of nuclear service,
woes of East Asian financial markets, volatility of Indian currency and the redemption
pressures faced by the Unit Trust of India (UTI) in respect of its US–64 Scheme made the Nifty
decline from 1212.75 in April, 1998 to 808.7 in October, 1998 and the Senses from 4280.96 to
2764.16.
In the year 1999–2000, the Nifty and the Sensex return increased from 0.00294 percent to
0.15606 per cent and -0.02482 per cent to 0.14112 percent respectively. The union budget of
1999, strength of the Government and also its commitment towards second generation reforms
improved macro economic parameters and better corporate results raised the return. In this year
the growth rate of GDP and industrial sector was 6.4 per cent and 6.6 per cent respectively and
within industrial sector, the growth rate of manufacturing sector was 7.3 per cent.
The trend got reversed during 2000–2001.The Indian economy decelerated and the Nifty and
the Sensex yielded negative return of –0.09435 per cent and -0.13788 per cent respectively.
There was a large sell off in new economy stocks in global markets. This brought down the
Nifty from the height of 1636.95 in April, 2000 to the lower level of 1108.20 in October, 2000
and the Sensex from 5426.82 in April, 2000 to 3689.43 in October, 2000. The growth rate of
GDP and the industrial sector declined from 6.4 per cent to 6 per cent and from 6.6 per cent to
4.9 per cent respectively. Within the industrial sector, the growth rate of manufacturing sector
declined to 5.2 per cent and the infrastructure sector also registered a lower growth as
compared to that of the previous year.
Scams have over and again proved the vulnerability of the regulatory network and system of
the finance and capital markets in this year. Ketan Parek scam in the stock market resulted in a
big default in Calcutta Stock Exchange, the BSE and the NSE. Several stockbrokers grossly
misused the badla finance given to them by investors. FIIs investment was very low in that
year. The above cited reasons were the major reasons for the negative returns.
The year 2001–02 recorded positive return of 0.00317 per cent but Sensex had negative return
of -0.01129 per cent. The introduction of rolling settlement and derivatives encouraged FIIs
and domestic investment even though markets were affected by riots in Gujarat, cyclone in
Orisa, suspension of repurchase facility under UTI’s US 64 scheme and the attack of World
trade Center, Indian Parliament and Jammu and Kashmir Assembly.
46
The daily average return in the Nifty and the Sensex was the highest in the year 2003–04.
Strong economic fundamentals exhibited in the fall in interest rates, strong GDP growth rate,
increase in foreignexchange reserves and exports of Indian companies doubled the Nifty and
the Sensex in the first three quarters. Further, the large expenditure by the Government on
infrastructure sector and the reform process enhanced the morale and motivation levels of
Corporate India which in turn boosted the stock market returns.
There was a decline in the return in the year 2004–2005. As the index value of the Nifty
sharply came down from 1892.45 and 5925.58 respectively on 23rd April 2004, to 1388.75 and
4505.16 respectively in May, 2004, a lower circuit breaker was applied on the NSE for the first
time. This brought a total halt to all trading and the fund flow to stock market from the retail
investors and the Foreign Institutional Investors dwindled. Slow down in Chinese economy, tax
exemption on long term capital gain, and tax reduction on short term gain, the appreciation of
rupee against the US dollar, low returns of bank FD rate and insurance policies and negative
returns of debt market mutual funds prevented the negative return. The over all performance of
the stock markets in the world was well. By 2005, India’s growth story was well established.
Money started pouring in from everywhere. A new industrial resurgence; a pick up in
investment; modest inflation in spite of spiraling global crude prices; rapid growth in exports
and imports with a widening of the current account deficit; laying of some institutional
foundations for faster development of physical infrastructure; progress in fiscal consolidation;
and the launching of the National Rural Employment Guarantee (NREG) Scheme for inclusive
growth and social security increased the return in the year 2005-2006. All these factors boost
the Indian stock market scaled high. Two things have happened in this period to push the
market to uncharted territory. One is a robust inflow of foreign money, as more and more FIIs
have rushed to pump money into the Indian market. What is new about these inflows is the
decisive move made by Japanese funds to look at India as an alternative to China, the bulk of
the $ 1.9 billion that has flowed into Indian markets in July alone has come from Japanese FIIs,
taking the total FII investments in 2005 to around $7 billion. The number of new FIIs
registered during the year has also gone up significantly.
Again there was a decline in the market return in the year 2006-2007. Global crude oil prices
were surging yet again and had touched $78 a barrel due to the tensions in West Asia and the
hurricanes from the Atlantic into the US east coast of the year further surged in crude prices
and oil production and refinery output were disrupted in the affected area. Global liquidity had
almost been drained off following the rate increases in the US, Europe and in Japan. FII flows
in 2006, at about $8.5 billion (around Rs 38,000 crore), were lower by 20 per cent than in 2005.
RETURNS IN BULL PHASE AND BEAR PHASE:
Ups and downs in the share prices are quite natural in stock market. The bull and the bear
markets have certain characteristics and the investors adopt different strategies in the bull and
the bear markets. The rise and the fall of shares are linked to a number of conditions such as
political climate, economic cycle, economic growth, international trends, budget, general
business conditions, company profits, product demand etc. In the bull market, buy–hold
47
approach is adopted and in the bear market sell–move out approach is adopted by the investors.
Results of return during the bull and the bear phases are presented in the Appendix: Table 2.
Analysis:
The durations of the bull and the bear phases are more or less similar for the stocks of the Nifty
and Sensex. In the bear phase–A, they had negative return of –0.22900 per cent and –0.25564
per cent respectively. Nuclear tests conducted in May, 1998 and imposition of economic
sanctions by the US, Japan and other industrialized countries resulted in uncertainty in the
Indian stock market. In the bear phase, the FIIs net investment was negative and they were net
sellers except in July and September 1998.
The growth in macro economic factors like GDP, industrial sector and manufacturing sector
turned out to be positive with good corporate results. FIIs average monthly investment was
Rs.52.41 crore in the bull phase. This moved the Nifty and Sensex to newer peaks. There was a
hike in the Nifty and the Sensex index level from December, 1998 to February, 2000.
The bear phase–B lasted for more than one and a half year due to economic and financial
turmoil. FIIs average monthly investment during the phase was Rs 43.15 crore which was very
low compared to the investment in the previous bull period. National and international events
like fall in the growth of GDP, the earth quake in Gujart, Ketan Parek scam, UTI’s ban on
repurchase facility under US 64 scheme , the proposal to increase the tax on distribution of
dividend by companies and MFs from 10 per cent to 20 per cent set the bear phase in motion.
Then the Nifty and the Sensex index oscillated back and forth from 869.05 to 1193.05 from
September, 2001 to April, 2003 and 2600.12 to 3712.74 from September, 2001 to March 2003
respectively. The net inflows of FIIs declined from Rs.87552 mn in 2001–2002 to Rs.26889
mn in 2002 – 2003. FIIs were net sellers in the month of June and October, 2002.
The Nifty and Sensex experienced a steady upward movement from April 2003 to January
2004. About 83 per cent of the NSE stocks were up in the bull phase. In the mid 2003, India
was one of the preferred FIIs destinations in Asia compared to Korea and Taiwan.
Liberalization in EXIM policy, monetary policy and mini–budget, rapid growth in the
economy, superior return on equity (ROE) vis-à-vis other market in the region, low volatility in
ROE, a strong financial system, a robust corporate performance and the strong risk adjusted
return of the Indian market attracted many foreign investors to India.
The busy bull market turned into bear market for a very short duration. All the indices saw
continuous and substantial fall from January, 2004 to May, 2004. Many reasons can be cited
for this fall. The ban on Participatory Notes made FIIs to sell and the banks that did margin
funding against shares also started selling. Retail investors and HNIs transferred some portion
of their holdings in equities to bullion market because the price of gold increased to Rs.6360
per 10 gm on 7th January, 2004 and the silver increased to Rs10, 610 a kg on 2nd March, 2004.
On 14th May 2004 the value of the Nifty plunged deeply from 1582.4 to 1388.75 on 17th May
2004, and the circuit breaker was applied on the Nifty for the first time. The prospect of a non-
BJP government in the center created a doubt about the reform process in the minds of
investors and the brokers, and this affected the sentiment of the domestic investors.
48
After the election results, the market sentiment turned different for the better. On 6th July 2004,
the railway budget was presented. The market responded to the railway budget positively. The
rise in rupee value, the fastest growth in economy (8.2 per cent) and the manufacturing boom
attracted huge FIIs inflows. FIIs holding in the Nifty stock in June, 2004 was Rs.1, 10, 000
crore and that FIIs registered with SEBI, increased from 492 in 1999 to 694 by April, 2005.
Continuous GDP growth, sustained industrial growth and heavy FII’s inflows strengthen the
stock market in its peak with its ups and downs.
8. Findings:
Factors responsible for Volatility:
Indian stocks are found to be highly volatile. Volatility is caused by a number of factors such as
speculation, the trading and settlement system, the government, inflation, interest rates,
announcement of corporate results, etc. All these factors directly or indirectly influence
movement in share prices. Apart from these, the factors responsible for high volatility can be
explained as follows:
 Inclusion of the new economy stocks, most of which were over-valued in the BSE
index.
 Increased influence of international stock indices, espicially the NASDAQ.
 High speculation when the badla system was prevelent led to large fluctuations in
prices.
 Day trading increased which led to wild fluctuations in intra-day prices.
 Foreign Institutional Investors (FIIs), exit the markets at the slightest whiff of trouble.
This increases volatility in the stock markets. Domestic investors follow FIIs and
49
emaluate their investment pattern. If, FIIs buy, everyone buys and if FIIs sell, everyone
sells.
 Indian markets have high volume but they lack depth as the volums are contributed by
few institutional participants. Indian markets lack hedge funds and pension funds,
whch can take a long-term view of the markets.
 External factors such as world politics and disturbances, the IT revolution, the
information boom by the business news channels, rising oil prices and apprehensions
of rise in international rates contributed to high volatiliy.
 The announcement in the Union Budget 2004-05 regarding imposition of the Securities
Transaction Tax (STT) affected the market sentiments adversely.
These factors, in turn, are responsible for the development of the stock market in our country
and making it comparable with the global markets.
9. Recommendtions:
This kind of volatility and sudden crash of the market is not a good indicator of sound financial
markets. It may affect the confidence of the retail as well as the foreign investors in the Indian
markets. Therefore, the government needs to look into the situation and take some steps to
strenghten the markets. The following measures are suggested to remove the structual
deficiencies of the market and improve the market mechanism:
 There is lack of depth in the market. The fear of FIIs pulling their money out of the
market is always seen as a big threat. To avoid this, more institutional players such as
pension funds are required to invest in the market and provide it the required depth.
50
 There is a need for a robust securities lending and short selling infrastructure. It will
help the long term investors to earn on their investments and provide heterogenerity in
the market.
 Securities and Exchange Board of India (SEBI) needs to keep a vigil on the sharp rise in
any stock without a reasonable cause. It needs to keep track of the investors in such
companies and trace the source of investment to avoid any type malpractices.
 There is inability of the banking system to turn around the funds quickly. When the
Sensex was falling, the banking could not divert the funds to rescue the investors
quickly which led to margin calls and sudden crash of the market.
 To control insider trading and manipulation of prices, strict regulatory and punitive
measures should be adopted by the SEBI and stock exchanges.
 To stop operations in the unofficial and unregulated grey market, the publication of
unofficial quotation in newspaers and magazines should be declared illegal and sale of
shares before acquisition by buyers should be banned.
 To avoid confusion among the investors, there should be proper coordination among the
stock exchanges in India. There should not be any overlapping in their areas of
operations.
 Investors should take into consideration various things before investing into scripts such
as:
 Financial position of the company.
 Liquidity position.
 Past performance of company.
 Brokers should not exceed their trading limit in terms of upper and lower limit.
10. Conclusion:
51
The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the
investors. So, over- reactions and wrong speculation can give rise to irrational behavior of the
Stock Market. Excessive optimistic speculation of future prospects can raise the prices of
stocks to an extreme high and excessive pessimism on the part of the investors can result in
extremely low prices.
So, it is extremely difficult to make predictions about the Stock Market and the inexperienced
investors who are not that much interested in financial analysis of stocks; rarely get the
financial assistance from the Stock Market at the time of need.
The factors influencing the stock market affect the volatility of the market in which they are
traded. These factors, in turn, are responsible for the development of the stock market in any
country and making it compareable with the global markets. So, stock market development is a
multi-dimensional concept.
Though many of the investors have lost life saving in the recent correction, there is life after the
crash. The Indian growth story is intact with a forecast of over 9% growth for 2009-2010. The
investment pipeline is estimated to be Rs.5, 00,000 crores. The government continues to spend
heavilty on the infrastructure projects. Domestic demand is still robust. Nevertheless, the Indian
stocks will continue to be attractive. Moreover, the fear of recession in the US will force the
global investors to look for alternative investment destinations and India will be the biggest
beneficiary. The only thing to be kept in mind is that greed always leads to devastations. The
investors should not aim for very high returns as the level of returns is always positively
correlated to the level of risk.
11. Limitations:
 A period of 60 days was a very short period to understand the stock market.
52
 The project is based on secondary data collected from other souces magazines,
newspaper and websites etc.
 Reliability of the sources could also be limitation for the project.
 Possibility of error in analysis of data.
 The analysis is based on the past performance and does not confirm the future
performance.
12. References:
53
Books:
 “Indian Financial System”, Second Edition ----- Bharati V. Pathak.
 “Capital Markets in the BRIC Economies” ------ Rituparna Bhattacharya, Anuradha Sen
and Sandip Lahiri Anand.
 “Money, Banking & International Trade” ------- M.L. Jhingan.
Magazines:
 Cometition Refresher.
Websites:
 www.karvy.com
 www.bseindia.com
 www.nseindia.com
 www.investopedia.com
 www.sebi.com
 www.google.com
 www.wikipedia.com
54
13. Annexure:
Table 1:
55
Descriptive Statistics for Various Phases –Nifty and Sensex
Phase Indices Period Minimum Maximum Daily Average

Return
BEAR –A Nifty 21-4-1998 808.7 1212.75 -0.2290
-03-12-98
Sensex 21 -4-1998 2764.16 4280.96 -0.2556
-3-12-98
BULL –I Nifty 4 – 12-98 828.75 1756.00 0.2585
-21-02-2000
Sensex 04 – 12-98 2849.82 5933.56 0.2587
-22-02-2000
BEAR –B Nifty 22-02-2000- 854.2 1739.05 -0.1533
21-09-01
Sensex 23-02-2000 2600.12 5810.17 -0.1778
-21-09-01
OSCILLATING Nifty 24-09-2001- 869.05 1193.05 0.0218
25-04-2003
Sensex 24-09-2001 2617.35 3712.74 0.0315
-25-04-2003
BULL – II Nifty 28-04-2003 929.5 1982.15 0.4211
-14-01-2004
Sensex 28-04-2003 2936.71 6194.11 0.4205
-14-01-2004
BEAR – C Nifty 15-01-2004 1388.75 1944.45 -0.3819
-17-05-2004
Sensex 15-01-2004 4505.16 6064.10 -0.3432
-17-05-2004
BULL – III Nifty 18-05-2004 1446.1 6287.85 0.1138
-31-03-2008
Sensex 18-05-2004 4644 20873.0 0.1183
-31-03-2008
56

Karvy LTD 03 Format

Hochgeladen von

Dokumentinformationen

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Karvy LTD 03 Format

Hochgeladen von

Copyright:

Verfügbare Formate

TITLE OF THE PROJECT:

“THE BEHAVIOUR OF INDIAN STOCK

UNDER THE GUIDANCE OF

Mr. Subhendu Mookherjee

Prof. Abhijit Chakrabarty

EASTERN INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT

For me, acknowledgement is a genuine opportunity to express my sincere thanks

First of all, my sincere gratitude is extended to Mr. Subhendu Mookherjee

I further express my sincere thanks and indebtness to Ms. Mohua Chatterjee,

I express my deep sense of regards to Prof. Abhijit Chakrabarty, (Faculty,

The project report on “The Behaviour of Indian Stock Market” at KARVY

TITLE OF THE PROJECT:.........................................................................................1

KARVY STOCK BROKING LTD

In 1982, a group of Hyderabad-based practicing Chartered Accountants started Karvy

The business of KCL includes:

THE KARVY CREDO

 “Our Clients. Our Focus

KARVY STOCK BROKING PRIVATE LIMITED

Stock broking services

Distribution of Financial Product

Private client group

As per the Quality Policy, Karvy will:

 Has more than 25,000 investors visiting our 575 offices.

 Among the top 3 stock brokers in India (4% of NSE volumes).

The objectives of the project can be mentioned as below:

4.1 Data Collection:

5. Data Projection and Analysis:

The Financial System of the Market Performs Three Main tasks:

Stock market investment:

Main Participants of the Stock market

5.2 Functioning of the Stock Market

Contribution of Stock Market

5.3 Stock Market and Economic Growth:

5.4 Stock Market in India:

Thus, astock exchange, (formerly a securities exchange) is a corporation or mutual

POST-REFORMS STOCK MARKET SCENARIO:

 Regional stock exchanges.

 The National Stock exchange (NSE).

 Mumbai, Ahmedabad, Patna, Indore ----------- Voluntary non-profit making.

 Hyderabad, Pune, Rajkot, Magadh ----------------Company by gurantee.

Functions of Stock Exchanges: An Overview

The role of stock exchanges:

 Raising capital for businesses.

Pattern of Growth of Stock Exchange:

In the figure, we can see the growth of Indian Stock

And, at present, there are 23 stock exchanges in India

How to find a good stock?

CAPEX or Capital Expenditure:

Risk and the level of reward:

High profit margin:

5.5 Bombay Stock Exchange (BSE):

5.6 SENSEX - The Barometer of Indian Capital Markets

BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index

 Base Year :1978-79

Companies Listed in the Sensex:

(As of January 12, 2009)

Code Name Sector Market Cap Weight in

500410 ACC Housing Related 15,500.35 0.87

500300 Grasim Industries Diversified 23,603.36 1.65

532174 ICICI Bank Finance 85,589.54 7.98

500875 ITC Limited FMCG 77,736.80 5.08

500325 Reliance Industries Oil & Gas 329,178.73 15.35

524715 Sun Pharmaceutical Healthcare 26,441.43 2.34