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A Summer Training Report On FUNDAMENTALS OF STOCK MARKET Submitted in partial fulfillment of the requirement for the Degree of MASTER



Submitted To Dr. Sudesh Miss Sunidhi

Submitted By AMIT KUMAR MBA (108)


I AMIT KUMAR hereby declare that the dissertation FUNDAMENTALS OF STOCK MARKET assigned to me for the requirement of partial fulfillment of Master of Business Administration (University School of Management) degree from Kurukshetra University, Kurukshetra is the original work done by me and the information provided in the study is authenticated to the best of my knowledge. The study has not been submitted to any other institution or university for the award of any other degree.


The present report is an amalgamation of hard work and contribution of experience of eminent personality. The limited vocabulary will not fail me to express my loyal and vulnerable thanks and gratitude to Mr. Abhinay Bansal (Branch Manager) moral support and help during the course of study. I emphatically express the regards and gratitude towards my speculative and dignified guide Mr. Varun KUMAR for his expert invaluable and tireless guidance; constant encouragement; Painstaking and constructive criticism to accomplish such laborious and exhaustive work timely and perfectly. All the words in lexicon futile and meaningless if I fail to express my sense of regard to my parents for their scarifies, blessings and prayers; everlasting love and pain and belief in me.





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Introduction of Stock Exchange

Stock Exchange is a market in which securities are bought and sold and it is an essential component of a developed capital market. The securities contracts (Regulations) Act. 1956 defines Stock Exchange as follows" It is an association organisation or body of individuals, whether incorporated or not, established for the purpose of assessing regulating and controlling of business in buying selling and dealing in securities" A stock exchange thus imparting marketability and liquidity to securities encourages investment in securities and assists corporate growth.

Stock Exchange is regarded as an essential concomitant of the capitalistic system of economy. It is indispensable for the proper functioning of corporate enterprise. It brings together large amounts of capital necessary for the economic progress of country. It provides necessary mobility to capital and directs the flow of capital into profitable in a country and exerts a powerful and significant influences as a depressant or stimulant of business activity. It may be defined as the place or market where securities of joint stock companies and of government or semi-government bodies are dealt in."


Stock Exchange means any body or individuals whether incorporated or not constituted for the purpose of assisting regulating or controlling the business of buying selling or dealing in securities. It is an association of member brokers for the purpose of self regulation and protecting the interests of its members. It can operate only if it is recognized by the government under the securities contracts (Regulation) Act. 1956. The recognition is granted under section 3 of the Act by the Central government.

The share market performs certain essential economic function it: Provides a ready market for buying and selling of securities. Direct the flow of capital in the most profitable channels. Induces corporate enterprises to raise their standards of performance. Offers an easily understood evaluation of the financial condition and prospects of listed firms. .


Despite a seemingly high savings rate, India faced a severe shortage of investible resources. By early 1990's it was recognized that it is crucial to raise funds from abroad to fill the gap. Financial sector reforms were needed to remedy the structural weaknesses and inefficiencies in the stock markets, primary markets, banking and insurance sectors.

Reforms were required in order to boost investors confidence and broaden the investor base. The Indian corporate sector demanded these reforms in order to reduce the cost of capital and to enhance its competitiveness. The government seriously deliberated about these reforms in order to facilitate participation by foreign institutions and corporate.


The origin of stock exchange in India can be traced back to the later half of 19th century. After the American Civil War (1860-61) due to the share mania of the public, the number of broker dealing in shares increased. The brokers organized an informal association in Mumbai named "The Native Stock and Share Brokers Association" in 1875. Increased activity in trade and commerce during the First World War and Second World War resulted in an increase in the stock trading. Stock exchanges were established in different centers like Chennai, Delhi, Nagpur, Kanpur, Hyderabad and Bangalore. The growth of stock exchanges suffered a set back after the end of World War. Worldwide depression affected them. Most of the stock exchanges in the early staged has a speculative nature of working without technical strength. Securities and Contract Regulation Act 1956 gave power to the central government to regulate the stock exchanges. The stock exchanges Mumbai, Calcutta, Chennai, Ahmadabad, Delhi, Hyderabad and Indore were recognized by the SCR Act. The Bangalore stock exchange wars recognized only in 1963. At present we have 23 stock exchanges.

Till recent past floor trading look place in all the stock exchanges. In the floor trading System, the trade takes place through open outcry system during the official trading hours trading posts are assigned for different securities where buy and sell activities of securities took place. This system needs a face to face contact among the traders and restricts the trading volume. The speed of the new information reflected on the prices was rather slow. the deals were also not transparent and the system favored the brokers rather than the investors. The setting up of NSE-and OTCEI with the screen based trading facility resulted in more and more stock exchanges turning towards the computer based trading. Bombay stock introduced the screen base trading system in 1995, which is known as BOLT (Bombay on line trading system). Madras stock exchange introduce automated network trading system(MANTRA)on October 07,1996, apart from BSE Vadodara, Delhi, Pune, Banglore, Calcutta and Ahmadabad stock exchange have introduced screen based trading. Other exchanges are also planning to shift to the screen-based trading.


The origin of the Bombay (Mumbai) stock exchange dates back to was organized under the name of was "The Native Stock and Share Brokers Association" as a voluntary and non-profit making association. It recognized on a permanent basis in 1957.This premier stock exchange is the oldest stock exchange in Asia. The objectives of the stock exchange are: To safeguard the interest of investing public having dealing on the exchange. To establish and promote honorable and just practices in securities transactions. To promote, develop and maintain well-regulated market for dealing in securities. To promote industrial development in the country through efficient resource mobilization by the way of investment incorporates securities.

The Trading system

In March 1995.the Bombay (Mumbai) stock exchange has introduced screen based trading called BOLT (BSE on-line trading). The Bolt is designed to get best bids and offers from jobbers' book as well the best buy and sell orders from the order book. Slowly the network is being extended to other cities too. Now the Bolt has a nation wide network. Trading Work Stations are connected with the main computer at Mumbai through Wide Area Network (WAN). The capacity of the Tandem hardware of BOLT is 5,00,000 traders per day (in 6:15 hours i.e. from 9:15 am to 3:30 p.m.). After getting specific approval from SEBI, BOLT connections have been installed in Ahmadabad, Rajkot, Pune, Vadodra and Calcutta.


The National Stock Exchange (NSE) of India became operational in the capital market segment on 3rd, November 1994 in Mumbai. The genesis of the NSE lies in the recommendations of the Pherwani committee (1991) Apart from NSE. It had recommended for the establishment of National Stock Market System also. Committee pointed out five major detect"' in the Indian stock market. The defects specified are:1. Lack of liquidity in most of the markets in terms of depth and breadth. 2. Lack of ability to develop markets for debt. 3. Lack of infrastructure facilities and outdated trading system. 4. Lack of transparency in the operations that affect investors' confidence. The main objectives of NSE are as follows: To provide a fair, efficient and transparent securities market to investors

using an electronic communication network. To enable shorter settlement cycle and book entry settlement system. To meet current international standards of securities market.

Promoters of NSE are lDBI. ICICI. IFCI, LIC, GIC, SBI, Bank of Baroda, Canara Bank, Corporation Bank, Indian Bank, Oriental Bank of Commerce, Union Bank of India, Punjab national Bank, Infrastructure Leasing and Financial Services, Stock Holding Corporation of India and SBI Capital Market are the promoters of NSE.


As my topic operations of stock market of dissertation which includes: Difference between NSE and BSE Working of stock market. These days we have seen more investment in stock market is to be made by: Individuals FIIs DII,s According to my personal experience I have very much interest in stock market operations so thats why I am choosing this topic for my dissertation. This topic is having following significance for my knowledge. How to deal in stock market. Direct consult with brokers and analyze of stock market operation. To got information about o Margin money o Settlement period

So above said point shows the significance of topic that I have chosen for my dissertation. OBJECTIVE OF THE STUDY

This topic of Fundamentals of Stock Market is such a burning topic which remains in limelight every year. The main objectives of the study have been listed as below:-

To conduct a comparative analysis between National stock exchange and Bombay stock exchange. To gain knowledge about the working of Indian stock market. To study the various avenues of investment in stock market.


Research has been undertaken, how the research problem has been defined, in what way the problem has been defined, what data have been collected and what particular method has been adopted and a lot of similar other questions coined for research methodology. Research Research is a systematic effort to gain new knowledge". The purpose of research methodology section is to describe the procedure for conducting the study. It includes research design, sample size, date collection and procedure of analysis of research instrument. Research design - A research design is purely and simply the framework for a study that guides the collection and analysis of required data. This study is Exploratory in nature. It helps in breaking vague problem into smaller and precise problems and emphasizes on discovery of new ideas and insights. It is an exploratory research because it is conducted on the bases of three aspects competition, liquidity and volatility. The exploratory

research was carried with the help of magazines, newspapers, journals & Internet as these sources helped in setting the research objective.


After the research design was formalized the process of data collection was initiated. Secondary Data: The secondary data is collected from newspapers, journals, magazines and Internet. UNIVERSE: Stock Exchange NSE & BSE


Indian stock exchanges host the most number of listed companies after United States. About 2500 companies are listed in the Bombay stock Exchange and the National Stock Exchange. Apart from foreign institutional investors, Indian stock market has some 30 million domestic investors. The working of stock markets has started in India as early as 1875, when 318 persons coming together to Native Share and Stock Brokers Association, with Re.1 for membership fee. Closest to BSE is National Stock Exchange, also located at Bombay. Nifty is the market index of NSE. Indian stock market has seen many ups and downs, but now is flying high, crossing every previous record and zooms to even further heights. BSE-Sensex crossed the four-figure mark of 1000 in 1990 and had a smooth bull ride till 1992, when the big-bull of Indian stock market, Harshad Mehta became a villain in the infamous Harshad Mehta scam broke out. The Sensex lost 570 points in no time and some eight to 12 million investors were pushed to bankruptcy.

After that incidence, came the Securities and Exchanges Board of India. With the enforcement of several regulations and strict guidelines, the confidence of investors was somewhat regained. With the present technology and practices, it is next to impossible to commit a fraud in Indian stock market. So claims the SEBI. Under the watchful eyes of SEBI, Indian stock markets once again gained momentum. The sensex crossed reached and crossed 6000 mark in 2000 and crossed the 7000 and 8000 marks in 2005 and 21000 in January 2008. Foreign Institutional Investors are pumping in money into the market. The FIIs are confident of a sustainable momentum. The momentum in the stock market can be associated with the growth in the fields of export, IT, ITES, telecommunication, education, energy sector, agriculture etc. The reformist policies being pursued by the government is also a factor for this growth. Due to large scale outsourcing by American and European countries, a large number of jobs also went to India, resulting in more affluent youth who are only happy to spend out their money. This helped in the growth of telecommunication, FMCG and manufacturing sectors. The steady growth of GDP at around 6% is also a critical factor in the upward movement of Indian stock market. If the predictions of experts come true, Sensex will go past 25000 by 2011. Apart from FIIs, the non-resident Indians also invest hugely in the stock market. Diminishing returns from bank deposits and the facilities of online

trading made them turn to stock markets and with the current bull-run many have made a good fortune from stock markets. The stockbrokers also chip in on and open offices in foreign countries, aimed at the NRIs there. The initial public offers by Tata Consultancy Services, Maruti Udyog Limited, ONGC etc were big events in Indian stock market. Not only did they put a great show, but also took the stock market to newer heights. TCS is a big weight in the stock market from the day it was listed. Traditional heavy weights are Reliance, Tata, Bharati etc. Now new entrants like Biocon are also play significant roles in the market. Growth directed at sky is visible everywhere. The biggest growth opportunity lies in the stock market itself. The population of India is well above one billion. The number of investors is just above 40 million. That is just 4% of the total population. The measures for a 10% growth are sought.

There are more than 8200 companies listed on Bombay Stock Exchange. You, like other investors, may not have: 1. Time 2. Knowledge. 3. Information. So, let others work for you. Experts give time to research, use their knowledge, get information from their sources. They shortlist 4-5 scrips

after their hard work, and put them in front of you, which is known as tips or recommendations. So with these 4-5 scrips, it will be easier for you to judge few scrips for investing, depending upon your investment, capacity to hold, return you want etc.

What is a Share? Which factors affect the price ?

A share is a divided unit of the value of a company. If value of a company is Rs. 1 Crore and there are 10 lacs of shares in issue, then each share is worth Rs.10. Then Rs. 10 is face value of the share. Price of each share in the market depends on supply - demand law, Political effects, interest rates, etc. Supply - Demand Law - Just like for any other products, demand and supply effects market price of shares of any company. When demand increases, price increases and vice versa. Political Effects - When government of any country is not stable, share prices can not go up. It is obvious that economical decisions of any government differs. Policies of the government help to increase prices of shares of some companies / industries, while other companies / industries may have adverse effects on their prices.

Interest Rates - Increase in interest rates surely effects the profitability of company by reducing profit of company.


Sensex is an abbreviation to the Bombay Stock Exchange Sensitive Index (Sensex). The bench mark index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively treated stocks on the BSE. The base value of the Sensex is 100 on April 1, 1979 and the base year of BSE-Sensex is 1978-79.

What Is SENSEX Comprise Of ?

Sensex is comprise of a select bond of 30 stocks i.e. it is based on the movement in the share price of there 30 selected companies. They are the most actively treated stocks in the market. In fact, they account for half the BSE's market capitalization. Besides they represent 13 sectors of the economy and are leaders in their respective industries.



Industries Ltd. Infosys Technologies Ltd. ICICI Bank Ltd. Larsen & Tourbo Ltd. Housing Development Finance Corporation Ltd. Bharti Airtel Ltd. HDFC Bank Ltd. State Bank of India ITC Ltd. Oil &Natural Gas

Corporation Ltd. Bharat Heavy Electrical Ltd. Hindustan Unilever Ltd. NTPC Ltd. Reliance Communicatio n Ltd. Tata Steel Ltd. Tata Consultancy Service Ltd. Sterile Industries Ltd. Reliance Infrastructure Ltd. Tata Power Company Ltd. Grasim Industries Ltd.

Maruti Suzuki India Ltd. JaiPrakash Associate Ltd. Mahindra & Mahindra Ltd. Wipro Ltd. Sun pharmaceutical Industries Ltd.

Hindalco Industries Ltd. DLF Ltd. Tata Motors Ltd. ACC Ltd. Ranbaxy Laboratories Ltd.

Who Select These Stocks ?

The index committee selects these stocks. This committee consists of all sorts of individuals including academicians, mutual funds managers, finance journalists, independent governing board members and other participants in the financial markets.

SELECTED PROCESS They definitely don't do it on the basis of their individual whims and fancies. The general guidelines for selection of constituents in Sensex are as follows:

LISTED HISTORY The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed company ranks among top 10 in the list of BSE Universe. In case, a company is listed on account of merger/demerger/amalgamation, would not be required. MARKET CAPITALIZATION minimum-listing history






capitalization in the top 100 market capitalizations of the BSE. Also the market capitalization of each company should be more than 0.5% of the total market capitalization of the Index.

TRADING FREQUENCY: The company to be included should have been traded on each and every trading day for the last one year. Exceptions can be made for extreme reasons like share suspension etc. INDUSTRY REPRESENTATION: The companies should be leaders in their industry group. LISTED HISTORY: The companies should have a listing history of at least one year on BSE.

TRACK RECORD: In the opinion of the index committee, the company should have an acceptable track record.

Basics of Sensex:-

1. "Sensex" is the popular name for the Bombay Stock Exchange Sensitive Index. 2. It is the oldest stock market index currently in use. 3. Sensex is the index of market capitalization. 4. The base value is 100 on April 1, 1979. 5. Sensex consists of only 30 representative stocks. 6. These 30 are the most active and representative stocks selected from over 6,300 scrips that are listed on the BSE.

7. The total market capitalization of these 30 stocks accounts for more than 38 per cent of the aggregate market capitalization of all BSE stocks. 8. The Sensex composition is modified by the BSE authorities at irregular intervals, to keep it in tune with the latest realities of the market. 9. A major reshuffle took place in the Sensex on August 19, 1996, when 15 stocks were replaced.


Stock prices change every day because of market forces. By this we mean that stock prices change because of "supply and demand". If more people want to buy a stock (demand) than sell it (supply), then the price moves up conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. (Basics of economics) Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what People are selling. If you know this you will know what prices go UP and what prices go, To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people. The most important factor that affects the value of a company Is Its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay In business. Public companies are required to report their earnings four times a year (once each quarter).

Dalal Street watches with great attention at these times, which are referred to as earnings seasons. The reason behind this Is that analysts base there future value of a company on their earning projection. If a company's results are better than expected, the price jumps up. If a company's results disappoint and are worse than expected, then the price will fall. Of course, its not just earnings that can change the feeling people have about a stock. It would be a rather simple world if this were the case! During the "dotcom bubble", for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors other than current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know Is that stock are volatile and can change in price very rapidly.

Just remember this: At the most fundamental level, supply and demand In the market determines stock price. There are many types of techniques and methods that investors use to figure out whether a stock price will go up or down! We will try to give you an introduction to these techniques in this article. But before we go into the concepts of stocks picking, and the techniques of analysis, let us understand one last basic thing

National Stock Exchange of India

The National Stock Exchange of India (NSE), is one of the largest and most advanced stock markets in the World. The NSE is the world's third largest stock exchange in terms of transactions. It is located in Mumbai, the financial capital of India. The NSE VSAT terminals, 2799 in total (31st December 2005), cover 320 cities in India. Origins The National Stock Exchange of India was promoted by leading financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives

Innovations NSE has remained in the forefront of modernization of India's capital and financial markets, and its pioneering efforts include:

Being the first national, anonymous, electronic limit order book (LOB) exchange to trade securities in India. Since the success of the NSE, existent market and new market structures have followed the "NSE" model. Setting up the first clearing corporation "National Securities Clearing Corporation Ltd." in India. NSCCL was a landmark in providing novation on all spot equity market (and later, derivatives market) trades in India. Co-promoting and setting up of National Securities Depository Limited, first depository in India. Setting up of S&P CNX Nifty. NSE pioneered commencement of Internet Trading in February 2000, which led to the wide popularization of the NSE in the broker community. Being the first exchange to trade ETFs (exchange traded funds) in India.

Currently, NSE has the following major segments of the capital market:

Equity Futures and Options Retail Debt Market Wholesale Debt Market

NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has launched several stock indices, including:

S&P CNX Nifty CNX Nifty Junior CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) CNX Midcap


NSE also conducts online examination and awards certification, under its programmes of NSE's Certification in Finanacial Markets (NCFM). Currently, certifications are available in 9 modules, covering different sectors of financial and capital markets. Branches of the NSE are located throughout India.

Bombay Stock Exchange

The Bombay Stock Exchange Limited (formerly, The Stock Exchange, Mumbai; popularly called The Bombay Stock Exchange, or BSE) is the oldest stock exchange in Asia. It is located at Dalal Street, Mumbai, India. The Bombay Stock Exchange was established in 1875. There are around 3,500 Indian companies listed with the stock exchange, and has a significant trading volume. At October 2006, the market capitalization of the BSE was

about Rs. 33.4 trillion (US $ 730 billion). The BSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely used market index in India and Asia. As of 2005, it is among the five biggest stock exchanges in the world in terms of transactions volume.

BSE indices
The BSE SENSEX (also known as the BSE 30) is a value-weighted index composed of thirty scrips, with the base April 1979 = 100. The set of companies which make up the index has been changed only a few times in the last twenty years. These companies account for around one-fifth of the market capitalization of the BSE.

Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock indices as well:


BSE Auto BSE Pharma

BSE Fast Moving Consumer Goods (FMCG) BSE Consumer Durables (SYMBOL: Cons Dura) BSE Metal

Report on growth of BSE

The stock markets reacted sharply to reports of the country's economic growth moderating this fiscal with the benchmark Sensex nose diving by over 610 points to 17K level on strong selling pressure across-the-board. Market men said US stock indices dropping for the third straight session on Wednesday also acted as dampening factor for the domestic bourses, which extended their losses for second day in a row. US stocks fell after Federal Reserve official cast doubt on the outlook for more interest rate cuts. The Dow Jones Industrial Average, Standard and Poor's Index and Nasdaq Composite Index all ended in the red. The 30-share BSE barometer opened higher at 18,198.68, but declined afterwards to the day's low of 17,492.28 points. The index finally ended the day at 17,526.93, a sharp loss of 612.56 points, or 3.38 per cent, from its last lose. The 50-share Nifty of the National Stock Exchange also fell by 189.30 points, or 3.56 per cent, to 5,133.25 from overnight close of 5,322.55. All stocks, barring ACC which gained by nearly 1 per cent, have ended down today. Hindalco Industries topped the pack of losers with its shares losing 5.63 per cent. Hindalco was followed by Satyam

Computers, Reliance Industries, NTPC and and which all lost in the range of 4-5 percent. Foreign Institutional Investors (FIIs) sold shares worth a net of Rs 485.94 crore on Wednesday while Domestic Institutional Investors (DIIs) purchased shares to the tune of Rs 357.32 crore as per provisional data. FII's were net sellers to the tune of Rs 2,086 crore in the Futures and Options segment on Wednesday, according to data issued by NSE.

Types of financial markets

The financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.

Secondary Market Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduitby facilitating value-enhancing control activities, enabling implementation of incentivebased management contracts, and aggregating information (via price discovery) that guides management decisions.

Difference between the primary market and the secondary market In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

What is SEBI and Its Role

The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental there to.

Various departments of SEBI regulating trading in the secondary market The following departments of SEBI take care of the activities in the secondary market. Sr.No. Name 1. of the Major Activities

Department Market Intermediaries Registration, supervision, compliance Registration and monitoring and inspections of all

Supervision department (MIRSD)

market intermediaries in respect of all segments of the markets viz. equity, equity derivatives, debt and debt



related derivatives. Regulation Formulating new supervising operations their the (except

policies functioning relating and

and and to

Department (MRD)

derivatives) of securities exchanges, subsidiaries, market and institutions such as Clearing and settlement organizations Depositories (Collectively referred to 3. as Market SROs.) Derivatives and New Supervising trading Products Departments segments (DNPD) of at derivatives exchanges,


introducing new products to be traded, and consequent policy changes

Products available in the Secondary Market

What are the products dealt in the secondary market

Following are the main financial products/instruments dealt in the secondary market: Equity: The ownership interest in a company of holders of its common and preferred stock. The various kinds of equity shares are as follows

Equity Shares: An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. A company may issue such shares with differential rights as to voting, payment of dividend, etc.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held.

Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

Preferred Stock/ Preference shares: Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in

payment of surplus. But in the event of liquidation, their claims rank below the claims of the companys creditors, bondholders / debenture holders.

Cumulative Preference Shares. A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level. Security Receipts: Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation Government securities (G-Secs): These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a

fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long date (upto twenty years). .

Role of Broker and Sub-broker in the Secondary Market

You can contact a broker or a sub broker registered with SEBI for carrying out your transactions pertaining to the capital market. Broker A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI. Sub broker A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange. You can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number begins with the letters "INB" and that of a sub broker with the letters INS". For the brokers of derivatives segment, the

registration number begins with the letters INF. There is no sub-broker in the derivatives segment. Yes. For the purpose of engaging a broker to execute trades on your behalf from time to time and furnish details relating to yourself for enabling the broker to maintain client registration form you have to sign the Member Client agreement if you are dealing directly with a broker. In case you are dealing through a sub-broker then you have to sign a Broker - Sub broker Client Tripartite Agreement. The Model Agreement between Broker-Client / Broker -Sub Broker - Client and Know your Client Form can be viewed from SEBI Website at Model Tripartite Agreement between Broker-Sub broker and Clients is applicable only for the cash segment. The Model Agreement has to be executed on the non-judicial stamp paper. The Agreement contains clauses defining the rights and responsibility of Client vis--vis broker/ sub broker. The documents prescribed are model formats. The stock exchanges/stock broker may incorporate any additional clauses in these documents provided these are not in conflict with any of the clauses in the model document, as also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines.

Member Client Agreement Form This form is an agreement entered between client and broker in the presence of witness where the client agrees (is desirous) to trade/invest in the

securities listed on the concerned Exchange through the broker after being satisfied of brokers capabilities to deal in securities. The member, on the other hand agrees to be satisfied by the genuineness and financial soundness of the client and making client aware of his (brokers) liability for the business to be conducted.

The brokers have to maintain a database of their clients, for which you have to fill client registration form. In case of individual client registration, you have to broadly provide following information: Your name, qualifications, NRI/others)

date of birth, photograph, address, educational occupation, residential status(Resident Indian/

Unique Identification Number (wherever applicable) Bank and depository account details Income tax No. (PAN/GIR) which also serves as unique client code. and concerned Stock exchange and Client Code Number.

If you are registered with any other broker, then the name of broker Proof of identity submitted either as MAPIN UID Card/Pan No./Passport/Voter ID/Driving license/Photo Identity card issued by Employer registered under MAPIN For proof of address (any one of the following): Passport Voter ID

Driving license Bank Passbook Rent Agreement Ration Card Flat Maintenance Bill Telephone Bill Insurance Policy Each client has to use one registration form. In case of joint names /family members, a separate form has to be submitted for each person. In case of Corporate Client, following information has to be provided: Name, address of the Company/Firm] Unique Identification Number (wherever applicable) Date of incorporation and date of commencement of business. Registration number(with ROC, SEBI or any government authority) Details of PAN Account Number: Details of Promoters/Partners/Key managerial Personnel of the Company/Firm in specified format. Bank and Depository Account Details Copies of the balance sheet for the last 2 financial years (copies of annual balance sheet to be submitted every year) Copy of latest share holding pattern including list of all those holding more than 5% in the share capital of the company, duly certified by

the Company Secretary / Whole time Director/MD. (copy of updated shareholding pattern to be submitted every year) Copies of the Memorandum and Articles of Association in case of a company / body incorporate / partnership deed in case of a partnership firm Copy of the Resolution of board of directors' approving participation in equity / derivatives / debt trading and naming authorized persons for dealing in securities. Photographs of Partners/Whole time directors, individual promoters holding 5% or more, either directly or indirectly, in the shareholding of the company and of persons authorized to deal in securities. If registered with any other broker, then the name of broker and concerned Stock exchange and Client Code Number.

Risk disclosure document

In order to acquaint the investors in the markets of the various risks involved in trading in the stock market, the members of the exchange have been required to sign a risk disclosure document with their clients, informing them of the various risks like risk of volatility, risks of lower liquidity, risks of higher spreads, risks of new announcements, risks of rumours etc.

How do I place my orders with the broker or sub broker You can either go to the brokers /sub brokers office or place an order over the phone /internet or as defined in the Model Agreement given above.

Maximum brokerage that a broker/sub broker can charge

The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations and hence, it may differ from across various exchanges. As per the BSE & NSE By Laws, a broker cannot charge more than 2.5% brokerage from his clients. This maximum brokerage is inclusive of the brokerage charged by the sub-broker. Further, SEBI (Stock brokers and Sub brokers) Regulations, 1992 stipulates that sub broker cannot charge from his clients, a commission which is more than 1.5% of the value mentioned in the respective purchase or sale note. Charges that can be levied on the investor by a stock broker/sub broker

Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at The trading member can charge: 1. Brokerage charged by member broker. 2. Penalties arising on specific default on behalf of client (investor) 3. Service tax as stipulated. 4. Securities Transaction Tax (STT) as applicable. rates prescribed by the Central Government from time to time. Pursuant to the enactment of the Finance (No.2) Act, 2004, the Government of India notified the Securities Transaction Tax Rules, 2004 and STT came into effect from October 1, 2004.

Rolling Settlement

In a Rolling Settlement trades executed during the day are settled based on the net obligations for the day. Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. Hence, trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day).The funds and securities pay-in and pay-out are carried out on T+2 day.

Pay-in day and pay- out day

Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement cycle is on T+2 rolling settlement basis i.e. the exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. The Exchanges will have to issue press release immediately after pay out.

The pay-in and pay-out days for funds and securities are prescribed as per the Settlement Cycle. A typical Settlement Cycle of Normal Settlement is given below: Activity Trading Clearing Settlement Post Settlement Rolling Settlement Trading Custodial Confirmation Delivery Generation Securities and Funds pay in Securities and Funds pay out Valuation Debit Auction Bad Delivery Reporting Auction settlement Close out Day T T+1 working days T+1 working days T+2 working days T+2 working days T+2 working days T+3 working days T+4 working days T+5 working days T+5 working days

Rectified bad delivery pay-in and pay-out Re-bad delivery reporting and pickup Close out of re-bad delivery

T+6 working days T+8 working days T+9 working days

Note: The above is a typical settlement cycle for normal (regular) market segment. The days prescribed for the above activities may change in case of factors like holidays, bank closing etc. You may refer to scheduled dates of pay-in/pay-out notified by the Exchange for each settlement from time-totime.

Sale of shares, when should the shares be given to the broker

The delivery of shares has to be done prior to the pay in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange and agreed with the broker/sub broker in writing.

How long it takes to receive my money for a sale transaction and my shares for a buy transaction

Brokers were required to make payment or give delivery within two working days of the pay - out day. However, as settlement cycle has been reduced fromT+3 rolling settlement to T+2 w.e.f. April 01, 2003, the pay out of funds and securities to the clients by the broker will be within 24 hours of the payout.


The Exchange purchases the requisite quantity in the Auction Market and giv es them to the buying trading member. The shortages are met through auction process and the difference in price indicated in contract note and price received through auction is paid by member to the Exchange, which is then liable to be recovered from the client.

Margin Trading Facility

Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism which enables investors to take exposure in the market over and above what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing the Margin Trading Facility from time to time. Corporate brokers with net worth of at least Rs 3 Crore are eligible for providing Margin trading facility to their clients subject to their entering into an agreement to that effect. Before providing margin trading facility to a client, the member and the client have been mandated to sign an agreement for this purpose in the format specified by SEBI. It has also been specified that the client shall not avail the facility from more than one broker at any time. The "total exposure" of the broker towards the margin trading facility should not exceed the borrowed funds and 50 per cent of his "net worth". While providing the margin trading facility, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the "total exposure" of the broker. Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as 40%. In addition, a broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number under

the SEBI (Central Database of Market Participants) Regulations, 2003, and name of the scrip.

SEBI Risk Management System

The primary focus of risk management by SEBI has been to address the market risks, operational risks and systemic risks. To this effect, SEBI has been continuously reviewing its policies and drafting risk management policies to mitigate these risks, thereby enhancing the level of investor protection and catalyzing market development.

The key risk management measures initiated by SEBI include: Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility. VAR based margining system. Specification of mark to Market margins Specification of Intra-day trading limits and Gross Exposure Limits Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges
Specification of time limits of payment of margins

Collection of margins on T+1 basis Index based market wide circuit breakers Automatic de-activation of trading terminals in case of breach of exposure limits Additional margins have also been specified to address the balance 1% cases. SEBI issued a circular modifying the above mentioned present risk management framework to move to upfront collection of VAR margins (instead of margin collection on T+1 basis). The entire details of the new framework which was made effective from May 30, 2005 is given in SEBI Circular MRD/DoP/SE/Cir-07/2005 dated February 23, 2005. In the revised framework the liquid assets deposited by the broker with the exchange should be sufficient to cover upfront VAR margins, Extreme Loss Margin, MTM (Mark to Market Losses) and the prescribed BMC. The Mark to Market margin would be payable before the start of the next days trading. The Margin would be calculated based on gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position. The exchanges would monitor the position of the brokers online real time basis and there would be automatic deactivation of terminal on any shortfall of margin.

Intra-day trading and exposure limits

With a view to enhance market safety, during the year 1997-98, the SEBI decided that the upper limit for gross exposure of the member broker of the stock exchange would be fixed at 20 times the base minimum capital and additional capital of the member broker. Gross exposure is the sum total of overall open positions of a broker. Most exchanges have a gross exposure limit lower than 20 times for additional safety. This is in addition to the intra-day trading limits of 33 1/3 times the base minimum capital and the additional capital of the broker, which were introduced by the SEBI in 199697 and have already been implemented by all the stock exchanges. Together they have strengthened the risk management in the secondary market ,To ensure margin are collected from the clients, it was made mandatory for member-brokers to collect margins from clients in all cases where the margin in respect of the client in the settlement, would work out to be more than Rs.50,000/-. Disclosures also have been made mandatory for the member-brokers with regard to the gross outstanding position of clients

Computerized screen based trading

Electronic form of trading has gained acceptance internationally as a highly transparent, cost efficient and faster mode for executing trades. Electronic trading also allows the spreading of trading facilities and instant transmission of information. This was aptly recognized by the SEBI and accordingly all the stock exchanges in the country were advised to introduce electronic trading system and automate their operations. The open-outcry system of trading which was prevalent in the stock exchanges in the country till a few years ago has now been fully replaced by computerised trading, unlike in some of the developed countries where the two systems still coexist on the same exchange.

The OTCEI, which was set up in 1992, was the first computerised exchange in India. The NSE started operations in 1994 with electronic trading, while all other exchanges introduced electronic trading subsequently. Till 1996-97, 16 exchanges in the country had shifted to electronic trading and in the year 1997-98 four more exchanges established these facilities. By March 31, 1999, all the 23 stock exchanges in the country had computerised on-line screen based trading. Details of the stock exchanges which went on-line during the year 1998-99 are as given below in Table 1.6

Derivatives Trading

The Report of the Committee on derivatives trading has been accepted by the SEBI Board. The amendment to the SC(R) Act to include derivatives in the definition of "securities" is pending with the Parliament

Committee on short sale

While short sales provide liquidity to the markets and are an essential feature for an efficient securities market, there are situations when short sales also could be misused and may be vulnerable to unfair trade practices and market manipulation. Markets in most countries while permitting short sales also have regulations to prevent misuse. Accordingly, the SEBI appointed a Committee to suggest measures for regulating short sales. The Stock Exchange, Mumbai and others made presentation on the current position and practices in the market related to short sale. Several suggestions were discussed at the meeting. The Committee would be inviting further comments of the exchanges on this issue and a report is expected to be prepared shortly.


In this section, we summarize the principal differences between NSE and BSE. Since the overall objective of our paper is to make quality of market comparisons between the two exchanges, we first start by outlining the principal differences between them. This would allow us to appreciate the theoretical underpinnings and enable us to formulate appropriate expectations regarding quality differences. We use the following dimensions with which to make these comparisons: Ownership, Governance, Trading Systems, Connectivity, Leadership, and Technology use.

NSE has been incorporated as a tax paying company and is owned by a group of large developmental financial institutions. On the other hand, BSE is organized as a brokers' association. The broker members who "own" seats on the exchange own and operate BSE.


NSE is professionally managed by a fulltime Managing Director who reports to a Board of Directors, and is, as such, managed by professionals who do not directly or indirectly trade on the exchange; ownership and management of the exchange 'are, therefore, Completely separated. Until NSE emerged, most of the stock exchanges in India were owned, controlled and managed by brokers who held seats on the various exchanges. This mutualized form of organization was prevalent in Indian stock exchanges, and BSE was no exception. In the case of BSE, one of the broker members is elected to administer the exchange and is designated as the president of BSE, who also owns a seat on the exchange, like the other broker members. Unlike BSE, NSE is the first demutualized exchange in India.

NSE uses the latest innovations in computing and network technologies to bring the best available trading system to its customers, and endeavors to constantly improve the quality of its trading system in its bid to attract and retain its customers. A fully automated screen based trading system, referred to as NEAT and developed by NSE, enables members from all over the country to trade with one another on a real-time basis with ease and efficiency. Three of the more prominent features of NEAT are discussed below. First, NEAT is a completely automated system for order matching that is completely order driven and provides complete anonymity to its trading members.

Second, NEAT operates on a strict price time priority such that all buy orders received on the system are sorted with the best-priced order getting the first priority for matching with an incoming market sell order. For instance, within orders which have the same price, time priority is enforced, that is, orders placed first are executed first. This matching process is computerised, keeping the system.

Transparent, objectives and fair. Each order remains in the system until it is matched with an incoming market order or until it is cancelled, whichever occurs earlier. Third, is the tremendous flexibility afforded by NEAT that provides users with several time related orders such as. Good-Till-Cancelled, Good-Till-Day, Immediate-or-Cancel. Moreover, traders are able to take advantage of price-related and volume related orders that may be built into an order. Fully accessible information on total. Order depth in a security, last traded price, quantity traded during the day, amongst others, allows traders to make informed decisions regarding price and order quantity. BSE has, however, been a laggard in the use of technology. Floor trading was still the prevalent mode of transacting when NSE commenced operations in November 1994.

Since then, a rapid erosion of market share forced BSE to establish its own computerized trading system. This move was a strategic response to a comparatively superior trading system established by NSE. By June 1995,

BSE inaugurated its own electronic trading system known as BOLT. BOLT adopted many of the features that were built into NEAT. BSE is a laggard compared to NSE; NSE stands out clearly as the originator of various new initiatives. In fact, whenever NSE unveils a new initiative, BSE usually responds, rather reluctantly after a time lag, with a view to protect its market share rather than a genuine effort to increase customer satisfaction.


NSE established a national network of terminals in over 300 towns and cities which included smaller towns and cities not currently served by any stock exchange. A reliable network technology is employed which uses satellite communication to link all member terminals to its main computer located in Bombay. This equal access to traders allover the country sharply contrasts BSE, which serves only the city of Bombay. BSE was initially operated as a regional monopoly with a charter allowing its trading members exclusive rights and access to its trading floor in Bombay. Shortly after NSE commenced its trading operations, its runaway success seemed to threaten the very livelihood of BSE brokers. The cost of a seat on BSE fell from about Rs. 40 million to about Rs. 10 million within a year of the opening of NSE. To counter this, BSE quickly set up BOLT, which started operating from 1995. The connectivity of BOLT

was still, however, restricted to the city of Bombay, while NEAT's influence continued to over the entire country. As the first automated exchange in India, NSE had a freer hand in determining its reach. With no physical trading floor limitation, it could logically argue that its reach is able to cover the entire country. BSE and all the other regional exchanges in India are regional monopolies, and according to their charter, are explicitly prohibited from setting up offices or providing their services in locations outside their respective jurisdictions. This explicit prohibition served to limit the connectivity and reach of BSE; for instance, a BSE member could not set up an office and provide trading services in the city of Delhi, which has its own stock exchange. NSE is unaffected by these limitations, has enjoyed much network externalities, at a cost to its most powerful rival, BSE.


From the outset, NSE behaved like a leader - it set the trend for other regional exchanges including BSE to follow. This leadership status bestowed NSE with the first mover advantages that BSE sadly lacked. After ceding its position as the premier exchange in the country, BSE has had little choice but to trail behind NSE. NSE has managed to maintain its position by being the innovator since its inception; its moves are carefully thought out and flawlessly executed: Moreover, NSE is motivated by its ambition to meet or exceed current international standards pertaining to the provision of trading services

whereas BSE has had to consider appropriate responses to major NSE initiatives. Frequently, BSE's ability to react has been stalled by the actions of its own members whose private incentives conflict with those of the exchange as a whole.


NSE owes its existence to advances in information technology, which it has effectively employed to break down barriers to entry in the stock market trading business. In continuing to apply the latest technology, NSE views itself as the frontrunner exchange. Having pioneered the use of automated order matching and increasing its reach to cover the entire country via satellites, NSE has, in effect, cleverly used technology to break the monopoly of BSE. For instance, on NSE, the time lag between placing an order and getting confirmation from anywhere around the country, takes less than two seconds. NSE's superior technology enabled it to consolidate a previously highly fragmented order book, and this consolidation has resulted in substantial increases in liquidity. BSE began the decade of the 1990's with a deep suspicion of technology; its members seeing technology as a major hindrance to maintaining its rent seeking activities. In fact, BSE's members were not in favour of a transparent system. When SSE chose rather reluctantly to embrace automation, its primary motive was to recapture some order flow that it had

lost to NSE. In choosing to implement this technology, SSE was torn between the goals of value maximization of the exchange and the rent seeking activities of its broker members. As a consequence, BSE has perpetually lagged behind NSE in adopting new and innovative technology.

BENEFITS OF STOCK EXCHANGE A stock exchange encourages people to save and invest their saving in shares and debentures. The recent boom in share markets has created financial awareness among the middle class. The stock market has become a central factor in house hold financial planning. The stock exchange helps capital formation which is an essential ingredient for quicker industrial development. Though capital formation, the stock exchange enables companies to undertake expansion. and modernization schemes. Every company talks in terms of hundreds of crores of rupees of investment in new projects these days. The stock exchange is .an Alibaba Cave from which the business community can draw unlimited money. Stock exchanges encourage several closely-held companies to go public. Encouraged by the boom in the recent past, more than 70,000 private limited companies are going public by offering shares to the public. This means that ownership is broad-based, management is diffused and more scrips are offered to the public for trading. Stock exchanges provide a market of the government to sell its securities in order to raise for meeting developmental activities.

The stock market acts as a mirror through which the general economic condition is clearly reflected.


The stock exchange is a money spinner-an EI Dorado of millions of investors across the country. Investors become rich overnight thanks to the stock exchange. Bimal Jain, a New Delhi housewife, as written in India Today (July 31, 1985), "bought 500 debentures of Reliance Textiles a year ago at the then market price of Rs.92. The company then offered to convert these shares, which are ruling at record offered to convert these shares, which are ruling at record levels, Jain's initial investment of Rs. 46,000 was worth Rs. 1.56 lakhs in barely a year." The stock exchange provides information about the scrips dealt there in and the prices at which they are quoted. All newspapers and periodicals carry columns on the stock markets. This enables investors to make a sound investment.


Stock exchange offers a wide market offer shares and debentures. The image of the company goes up once the shares are listed on a stock exchange. Quicker response from investors to the listed securities. The market rates of shares an debentures will be higher because of daily dealings on stock markets. This enhances the bargaining position of a company in the event of its merger with some other company.


To conduct a comparative analysis between national stock exchanges

and Bombay stock exchange. . a. No. of shares are different both NSE and BSE (NSE-50) (BSE- 30).
b. NSE run between (4500-5500) and BSE run between (15000-18000)

To gain knowledge about the working of Indian stock market

c. SEBI has the powers to regulate the business of stock exchanges other

stock market and mutual funds. d. Without broker investor could not invest in stock market. e. A member/ Broker registered stock exchange has to apply to the SEBI for registration. f. The rules regulation and by laws of the stock market, provide a measure of safely to the investors.

g. The net is used as a medium of trading in internet trading. Orders are communicated to the stock exchange through web sites (online trading) h. High liquidity is there i. Histories repeat it self. Every type of information is available for the investor.

To study the various avenues of investment in stock market. a. Equity b. Preference c. ULIP d. Mutual fund e. Debenture f. Forward


Despite of trying my level best there were still limitation, which I think remains there to draw fruitful conclusion. There were some practical problems, which come across and could not be properly death with. I have tried to put my maximum efforts to obtain the maximum authentic data. But in spite of such efforts, I sincerely accept some limitations which were beyond my control in this research. The limitations of the present study can be summarized as follows: The method of data collection used is secondary data to gather the information in the much desired manner. Time limit was the other constraint. Lack of primary data


We all know liquidity when we see it Liquidity is the ability to do large transactions, quickly, at low transactions costs. Depth How big a transaction can I do without affecting the price? Tightness What is the difference between buy and sell prices? Resilience How quickly does the market bounce back? The focus of the literature has become on measurement of transactions costs. High liquidity is low transactions costs. I. Trading volume Easy to measure. Does not measure transactions costs. Easy to fake. Bigger stocks will innately have higher turnover. II. Turnover ratio 365 days volume, divided by todays market cap. Rescale turnover so as to control for size. All the same problems as volume. Perhaps the most widely used most widely-comparable liquidity measure. III. Trading intensity Number of trades per minute. Does not measure transactions costs .In India, when market lot went to 1, the number of trades went up. IV. Average trade size Do not measure transactions cost. In India, when market lot went to 1, average trade size collapsed.

The limit order book Access to information in the LOB has been a breakthrough for liquidity measurement. Can accurately price the impact cost faced in doing a market order. NSE releases 4 snapshots of the order book every day. V. Impact cost Suppose we face bid/offer of 99/101. We define the ideal price as 99+101)/2 = 100. Suppose a transaction for 1000 shares goes through at Rs.102. We say the impact cost for doing 1000 shares is 2%. This is squarely about transactions costs. A speculator who buys 1000 shares, and then sells them off, using market orders both ways, spends 4%. Impact cost depends on transaction size. Overall, turnover has done well. But impact cost has not improved. This merits further investigation.


Suggestions for stock market Simplify transfer procedure. Make rating of the equities compulsory. Reduce number of holidays. Introduce two trading sessions in the place of the present one session trading. Create investors awareness. Make signature verification efficient.
Activate role of financial institutions.

Remove one-year limitation of the validity periods of the transfer deed. Integrate working of all exchanges.
Improve information dissemination system. Allow multiple memberships for brokers.

Increase the number of brokers. Give them better education and training. Allow brokers to advertise their business. Allow companies to buy back their own shares.


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