EFFECT OF STOCK MARKET ON INDIAN ECONOMY SUBMITTED TOWARDS PARTIAL FULFILLMENT OF POST GRADUADTE DIPLOMA IN BUSINESS MANGEMENT (Approved by AICTE, Govt. of India) (Equivalent to MBA) ACADEMIC SESSION 2009 – 2011
Subject – EEP Submitted to:
submitted by:
Dr. Tapan Kumar Nayak Faculty of IMS Ghaziabad Arora(09251)
Abhinav(09249) Akanksha(09250) Aman Amit kumar(09252) Amritanshu(09253)
INSTITUTE OF MANAGEMENT STUDIES LALQUAN GHAZIABAD UTTAR PRADESH – 201009 INDIA DECEMBER 2009 1
INSTITUTE OF MANAGEMENT STUDIES, GHAZIABAD CANDIDATE’S DECLARATION We hereby certify that the work which is being presented in the report entitled Effect of stock market on Indian economy in partial fulfilment of the requirements for the award of the Post Graduate Diploma In Business Management and submitted in the EEP EEP of the the Inst Instit itut ute e of Manag Managem emen entt Stud Studie ies, s, Ghaz Ghazia iaba bad d is an authentic record of our own work carried out during a period from November, November, 2009 2009 December December,, Kum Kumar Nay Nayak, ak,
Facu Facult lty y
under the the supervision supervision of Dr. Dr. Tapan
of Inst Instit itut ute e
of Mana Manage geme ment nt Stud Studie ies, s,
Ghaziabad. The matter presented in this report has not been submitted by us for for the the awar award d of any any othe otherr degr degree ee of this this or any any othe otherr Institute.
(ABHINAV) (AKANKSHA) (AMAN ARORA) (AMIT KUMAR) (AMRITANSHU) 2
ACKNOWLEDGEMENT
Any assignment
puts
to litmus
test of an individual
knowledge credibility or experience and thus sole efforts of an individual are not sufficient to accomplish the desire successful completion of a project involve interest and effort of many people and so this becomes obligatory on the part to record our thanks to those who helped us out in the successful completion of our project.
Life is a process of accumulating and discharging debts, not all of those can be measured. We can not hope to discharge them with simple words of thanks but we can certainly acknowledge them.
At this level of understanding it is often difficult to comprehend and assimilate a wide spectrum of knowledge without proper guidance and advice. Hence, we would like to take this opportunity to express our Heartfelt Gratitude to Respected
Dr. Tapan Kumar Nayak, PGDBM, IMS, Ghaziabad, for his round the clock Enthusiastic Support, Noble Guidance and 3
Encouragement which made this project successful. We are extremely thankful to him for making this project worthful.
TABLE OF CONTENTS:PAGE NO. 1. INTRODUCTION- INDIAN ECONOMY
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2. INDIA- A GROWING ECONOMY
8
3. STOCK MARKET
24
4. MARKET PARTICIPANTS
26
5. IMPORTANCE OF STOCK MARKET
27
6. BIBLIOGRAPHY 33
4
LIST OF TABLES: PAGE NO. 1. GRAPH- INDIA GDP GROWTH
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2. PER CAPITA INCOME OF STATES OF INDIA
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INDIAN ECONOMY INTRODUCTION Economics experts and various studies conducted across the globe envisage India and China to rule the world in the 21st century. For over a century the United States has been the largest economy in the world but major developments have taken place in the world economy since then, leading to the shif The rich countries of Europe have seen the greatest decline in global GDP share by 4.9 percentage points, followed by the US and Japan with a decline of about 1 percentage point each. Within Asia, the rising share of China and India has more than made up the declining global share of Japan since 1990. During the seventies and the eighties, ASEAN countries and during the eighties South Korea, along with China and India, contributed to the rising share of Asia in world GDP. According to some experts, the share of the US in world GDP is expected to fall (from 21 per cent to 18 per cent) and that of India GDP to rise (from 6 per cent to 11 per cent in 2025), and hence the latter will emerge as the third pole in the global economy after the US and China. Indian Economy experienced a GDP growth of 9.0 percent during 200506 to 9.4 percent during 2006-07. By 2025 the India's economy is projected to be about 60 per cent the size of the US economy. The transformation into a tri- polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU, though its impact
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will be a little over half that of the US. India, which is now the fourth largest economy in terms of purchasing power parity, will overtake Japan and become third major economic power within 10 years. t of focus from the US and the rich countries of Europe to the two Asian giants- India and China ISSUES AND PRIORTIES FOR INDIA
As India prepares herself for becoming an economic superpower, it must expedite socio-economic reforms and take steps for overcoming institutional and infrastructure bottlenecks inherent in the system. Availability of both physical and social infrastructure is central to sustainable economic growth. Since independence Indian economy has thrived hard for improving its pace of development. Notably in the past few years the cities in India have undergone tremendous infrastructure up gradation but the situation in not similar in most part of rural India. Similarly in the realm of health and education and other human development indicators India's performance has been far from satisfactory, showing a wide range of regional inequalities with urban areas getting most of the benefits. In order to attain the status that currently only a few countries in the world enjoy and to provide a more egalitarian society to its mounting population, appropriate measures need to be taken. Currently Indian economy is facing these challenges: •
•
•
•
•
•
• •
•
Sustaining the growth momentum and achieving an annual average growth of 7-8 % in the next five years. Simplifying procedures and relaxing entry barriers for business activities. Checking the growth of population; India is the second highest populated country in the world after China. However in terms of density India exceeds China as India's land area is almost half of China's total land. Due to a high population growth, GNI per capita remains very poor. It was only $ 2880 in 2003 (world bank figures). Boosting agricultural growth through diversification and development of agro processing. Expanding industry fast, by at least 10% per year to integrate not only the surplus labour in agriculture but also the unprecedented number of women and teenagers joining the labour force every year. Developing world-class infrastructure for sustaining growth in all the sectors of the economy. Allowing foreign investment in more areas Effecting fiscal consolidation and eliminating the revenue deficit through revenue enhancement and expenditure management. Empowering the population through universal education and health care. India needs to improve its HDI rank, as at 127 it is
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way below many other developing countries' performance. The UPA government is committed to furtering economic reforms and developing basic infrastructure to improve lives of the rural poor and boost economic performance. Government had reduced its controls on foreign trade and investment in some areas and has indicated more liberalization in civil aviation, telecom and insurance sector in the future.
India - a growing economy
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A growth rate of above 8% was achieved by the Indian economy during the year 2003-04 and in the advanced estimates for 2004-05, Indian economy has been predicted to grow at a level of 6.9 %. Growth in the Indian economy has steadily increased since 1979, averaging 5.7% per year in the 23-year growth record. In fact, the Indian economy has posted an excellent average GDP growth of 6.8% since 1994 ( the period when India's external crisis was brought under control). However, in comparison to many East Asian economies, having growth rates above 7%, the Indian growth experience lags behind. The tenth five year plan aims at achieving a growth rate of 8% for the coming 2-3 years. Though, the growth rate for 2004-05 is less than that of 2003-04, it is still among the high growth rates seen in India since independence. Many factors are behind this robust performance of the Indian economy in 2004-05. High growth rates in Industry & service sector and a benign world economic environment provided a backdrop conducive to the Indian economy. Another positive feature was that the growth was accompanied by continued maintenance of relative stability of prices. However, agriculture fell sharply
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from its 2003-04 level of 9 % to 1.1% in the current year primarily because of a bad monsoon. Thus, there is a paramount need to move Indian agriculture beyond its centuries old dependency on monsoon. This can be achieved by bringing more area under irrigation and by better water management. Because of the weakening of the US dollar for the last two years, (caused mainly by widening US deficits), Indian Rupee has steadily appreciated vis-à-vis US dollar. Though, this trend saw a brief reversal during may-august 2004. The latest Re/$ Exchange rate (March 2005) stood close to 44. Despite strengthening nominally against US $, Rupee depreciated against other major non-dollar
A strong BOP position in recent years has resulted in a steady accumulation of foreign exchange reserves. The level of foreign exchange reserves crossed the US $100 billion mark on Dec 19, 2003 and was $142.13 billion on March 18, 2005. The capital inflows, current account surplus and the valuation gains arising from appreciation of the major non-US dollar global currencies against US dollar contributed to such a rise in Forex reserves. The current account of BOP having been in surplus since 2001-02, turned into deficit in the first half of the current year( April-September 2004-05). Such a reversal was observed on the back of rise in POL and non POL imports which overwhelmed the growth of exports in US dollar terms at over 23 per cent. Growth momentum in exports was maintained; India's exports during Apr-Nov registered a growth of 24% from the last period but India's position was down from 30th to 31st rank in the top exporting countries of the w The main contributors to capital account surplus were the banking capital inflows, foreign institutional investments and other capital inflows. Alike current account, capital account too witnessed decline. The capital account surplus in April-September was also down by around US $ 1.5 million. Reserve money growth had doubled to 18.3% in 2003-04 from 9.2 in 2002-03, driven entirely by the increase in the net foreign exchange assets of the RBI. However, it declined to 6.4% in the current year to January 28, 2005. During the current financial year 2004-05, broad money stock (M3) (up to December 10, 2004) increased by 7.4 per cent (exclusive of conversion of non-banking entity into banking entity, 7.3 per cent) as compared with the growth rate of 10.3 per cent registered during the corresponding period of the last year. The downward trend in interest rates continued in 2004-05, with bank rate standing at 6% as on Dec 10, 2004. Banks recovery management
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improved considerably with gross NPAs declining from Rs 70861 crore in 2001-02 to Rs 68715 in 2002-03. During the current financial year (up to December 10, 2004) incremental gross bank credit increased by 20.5 per cent (exclusive of conversion, 16.6 per cent) as compared with a growth of 5.9 per cent in the same period of the previous year. NonFood credit during the financial year so far, registered a growth of 20.5 per cent (exclusive of conversion, 16.5 per cent) as compared with an increase of 8.4 per cent during the same period of the last year indicated a positive outlook. Equity market return was 85% in 2003-04, second highest in Asia. With continued higher corporate earnings in 2004-05, the sensex crossed 6800 mark in March 2005 but high stock market volatility remained higher in India compared to other Asian countries. The expectation of sensex crossing 7 K mark is not yet realized. Fiscal deficit of states & center was decreasing in early 90s but due to rise in fiscal deficit in recent years, corrective measures have been adopted. The fiscal deficit decreased to 7.9% in 2004-05 from a 9.4% of GDP in 2003-04. According to recent estimates, fiscal deficit in April-October 2004 is 45.2 per cent of BE compared with 56.0 per cent of BE in the corresponding period last year.
India's economy is on the fulcrum of an ever increasing growth curve. With positive indicators such as a stable 8-9 per cent annual growth, rising foreign exchange reserves, a booming capital market and a rapid rise in FDI in the last year, India has emerged as the second fastest growing major economy in the world . The economy has been growing at around 9 per cent in the past two years recording a growth rate of 9 per cent and 9.4 per cent in 2005-06 and 2006-07 respectively. Significantly, the industrial and service sectors have been contributing a major part of this growth, suggesting the structural transformation underway in the Indian economy. For example, industrial and services sectors have logged in a 10.9 and 11 per cent growth rate in 2006-07 respectively, against 9.6 per and 9.8 cent in 2005-06. Similarly, manufacturing grew by 9.1 per cent and 12.3 per cent in 2005-06 and 2006-07 and trade, hotel, transport and communication recorded a growth of 10.4 per cent and 13 per cent, respectively. And this process continues in the current fiscal year. On the back of 8.4 per cent and 9.6 per cent growth in GDP in the first quarter of 2005-06 and 2006-07, GDP grew by 9.3 per cent during April-June 2007. •
While overall industrial production grew by 9.2 per cent during AprilSeptember 2007, significantly, basic goods and capital goods rose by 9.4 per cent and 19.6 per cent this year compared to 8.8 per cent and 17.5 per cent during the same period last year.
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•
•
•
•
•
•
•
Services grew by 10.6 per cent in April-June 2007, compared to 9.2 per cent and 11.7 per cent during the corresponding period in 2005-06 and 2006-07. Manufacturing grew by 9.7 per cent during April-September this year, on the back of 12.3 per cent growth during the same period last year. Core infrastructure sector continued its growth rate recording 6.6 per cent growth, with electricity generation rising by 7.6 per cent this year compared to 6.7 per cent last year. Exports grew by 18.5 per cent in dollar terms during April-September 2007. Imports increased by 25.5 per cent in April-September 2007. Money Supply (M3) has grown by a robust 22.5 per cent (year-on-year) as of October 26, 2007 compared to 18.4 per cent last year. The annual inflation rate in terms of WPI was 2.97 per cent for the week ended October 29, 2007 as compared to 5.35 per cent a year ago. Fiscal deficit and revenue deficit decreased by 6.1 per cent and 11.8 per cent during April-September 2007-08 over the corresponding period last year.
Gross Domestic GGG(GDP) : INDIA Domestic ProdGGGRGGGGGGGGGGGGGGGGGGGGGGGGGGGRGG Gross Domestic Product (GDP Gross Domestic Product (GDP
FOR third successive year, the Indian economy has registered a highly
impressive growth during fiscal 2005-06. Sustained manufacturing activity and impressive performance of the services sector with reasonable support from the recovery in agricultural activity have added greater momentum to this growth process. After recording some slowdown in the third quarter (October-December) of 2005-06, real gross domestic product (GDP) registered a sharp increase in the fourth quarter (January-March) of 2005-06 benefiting from a pick-up in almost all segments of agriculture, industry and services. According to the revised estimates released by the Central Statistical Organization (CSO) in May 2006, real GDP accelerated from 7.5 per cent in 2004-05 to 8.4 per cent during 2005-06. The Indian economy has, thus, recorded an average growth of over 8 per cent in the latest three years (2003-04 to 2005-06).
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Growth Rates of Real GDP
Gross Domestic Product (GDP) : INDIA
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FOR third successive year, the Indian economy has registered a highly impressive growth during
fiscal 2005-06. Sustained manufacturing activity and impressive performance of the services sector with reasonable support from the recovery in agricultural activity have added greater momentum to this growth process. After recording some slowdown in the third quarter (October-December) of 2005-06, real gross domestic product (GDP) registered a sharp increase in the fourth quarter (January-March) of 2005-06 benefiting from a pick-up in almost all segments of agriculture, industry and services. According to the revised estimates released by the Central Statistical Organization (CSO) in May 2006, real GDP accelerated from 7.5 per cent in 2004-05 to 8.4 per cent during 200506. The Indian economy has, thus, recorded an average growth of over 8 per cent in the latest three years (2003-04 to 2005-06). Growth Rates of Real GDP (Base Year : 1999-2000)
(Per cent) 2004-05 Q1 Agriculture
Allied Activities 1.1 Agriculture Industry
-0.2
10.0
0.7
3.9
(23.5) (22.2) (20.8) (19.9)
Q2
Q3
3.5 -0.2 -1.2
2005-06 Q4
Q1
Q2 Q3
Q4
1.5
3.4
4.0
2.9
5.5
-
-
-
-
-
-
-
-
-0.5
10.7
0.7
-
-
-
-
-
-
-
-
-
5.2
6.6
7.4
7.6
6.6
8.0
8.1
6.8
9.5
6.3
7.0
7.9
(19.7) (19.5) (19.5) (19.3)
-
-
-
-
-
-
-
-
3.1 -2.6
0.0
3.0
2.1 Mining and Quarrying
4.4
5.3
5.8
0.9
8.2
6.0
5.7
3.7
2.2 Manufacturing
5.7
7.1
8.1
9.0
6.6
8.3
9.2
8.1 10.7
8.1
8.3
8.9
2.3 Electricity, Gas and Water Supply
2.8
4.8
4.3
5.3
4.9
7.9
3.1
1.4
2.6
5.0
6.1
Services
6.6
8.5
10.2
10.3 10.0
(56.8) (58.3) (59.7) (60.7)
-
7.4
8.2 10.6 11.6 10.1 10.3 -
-
-
-
-
9.7 11.0 -
-
3.1 Trade, Hotels, Restaurants, Transport, Storage and Communication
8.5
12.0
9.7
3.2 Financing, Insurance, Real Estate and Business Services
6.5
4.5
9.2
9.7
8.8
7.5
9.7 10.7
8.8 10.5
8.9 10.5
3.3 Community, Social
4.1
5.4
9.2
7.8 10.7
4.8
8.5 12.7
7.3
8.4
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11.0 10.2 12.9 10.6 11.5 10.6 11.2 11.7 11.0
8.0
7.6
(Base Year : 1999-2000)
World GDP growth hinges on India, China
Our Bureau
Chennai , Oct. 13 INDIA and China rank 154th and 121st in a listing of the 230-odd countries ranked by per capita GDP. So no matter how rapid the growth of these countries, it would do little to boost the growth of the world economy. Right? Not really. Low as per capita GDP for India and China may be ($3,100 and $5,600 respectively), their share in world GDP is around 6 per cent, thanks to their billion-plus populations. The other eight in the top 10 countries of the world ranked by total GDP — the US (No. 1), Japan (No. 2), Germany (No. 3), UK (No. 4), France (No. 5), Italy (No. 7), Spain (No. 8) and Canada (No. 9) — together account for 66 per cent of world GDP. But their sustainable rate of growth is generally around 2 per cent a year, compared to 7 per cent and 10 per cent for India and China respectively. Because of this, the share of India and China in incremental world GDP (which, at the rate of 4 per cent a year, amounts to $1.6 trillion a year) is 13 per cent, almost double their weight in total world GDP. In contrast the other eight countries in the top 10, which have a 66 per cent share in world GDP, have only a 33 per cent share in incremental
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GDP. In the absence of a major breakthrough in technology, this scenario is likely to remain unchanged over the next four or five decades. This is because of the as yet relatively virgin markets in India and China and high rates of return available on capital invested there as compared to investments in developed economies. Two conclusions emerge. First, growth of world GDP is more critically dependent on the rate of growth in China, and, more particularly, India than on the other eight countries in the top 10 - which are already functioning at near-peak potential. Second, though India and China will increase their ranking in world GDP at a relatively slow pace, their rank in terms of per capita GDP (and therefore disposable personal income) is going to shoot up in leaps and bounds
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Per capita Income of States of India
17
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Stock market A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately.
The Definition
The expression 'stock market' refers to the system that enables the trading of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market. Commodities are traded in commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter'). The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion 'face' or nominal value, 30 times the size of the U.S. economy…and 12 times the size of the entire world economy.[1] It must be noted though that the value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. (Many such relatively illiquid securities are valued as marked to model , rather than an actual market price.) The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock Exchange and the Deutsche Börse.
Trading
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Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders. Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery. The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a specialist, who goes to the floor trading post to trade stock. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called " program trading". The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.[2]. The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.
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From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant [citation needed]. Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders inhouse, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions[citation needed ].
Market participants Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions). However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners.'
History Historian Fernand Braudel suggests that in Cairo in the 11th century Muslim and Jewish merchants had already set up every form of trade association and had knowledge of every method of credit and payment, disproving the belief that these were invented later by Italians. In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. In late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurse, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam. 21
In the middle of the 13th century Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, Canada, China (Hongkong), India, UK , Germany, France and Japan.
Importance of stock market Function and purpose The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. 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. 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. Financial stability is the raison d'être of central banks. 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. 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
22
well as employment. In this way the financial system contributes to increased prosperity.
Relation of the stock market to the modern financial system The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 per cent of households' financial wealth, compared to less than 20 per cent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.
The stock market, individual investors, and financial risk Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables
From experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur— so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may
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drive prices unduly low. New theoretical and empirical arguments have been put forward against the notion that financial markets are efficient. According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this largely theoretic academic viewpoint also predicts that little or no trading should take place — contrary to fact— since prices are already at or near equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent — the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search failed to detect any specific or unexpected development that might account for the crash. It also seems to be the case more generally that many price movements are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period confirms this.[2] Moreover, while the EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for large price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact. Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that p eople are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.[3] Another phenomenon— also from psychology— that works against an objective assessment is group thinking . As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group. In one paper the authors draw an analogy with gambling.[4] In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over).
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The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically. The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the recent Nasdaq crash, less than 1 per cent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 crash, the average did not rise above 5%). The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)
Irrational behavior Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself. Therefore, the stock market can be swayed tremendously in either direction by press releases, rumors and mass panic. Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to predict.
Stock market index The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization (the total market value of floating capital of the company) weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
Derivative instruments Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges (which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or traded over-the-counter . As all of these products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market.
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Leveraged Strategies Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.
Short selling In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to artificially lower the price of a stock. Hence most markets either prevent short selling o r place restrictions on when and how a short sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets.
Margin buying In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim).
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New issuance Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion.
Investment strategies One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control and diversification. Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). . "
I. METHODOLOGY The objectives of the proposal indicate that the study must be carried out at the micro level. Furthermore, the study will be carried out both at the theoretical and empirical levels. At the theoretical level, we will elucidate the concept of inflation and its measurement. . At the empirical level, the study will be carried out by using suitable quantitative methods pertaining to measurement of inflation. The study will be based on both primary and secondary levels of information.
II. SAMPLE AND SOURCES OF DATA Data will be collected from various sources mainly websites like google.com , wikipedia.com, globalfindata.com,
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BIBLIOGRAPHY WWW.WIKIPEDIA.COM WWW.INDIAN STOCK MARKET.COM WWW.INDIAN ECONOMY.COM WWW.GDP GROWTH.COM
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