STOCK MARKET

A stock market is a market where securities that is shares, debentures and

government securities are bought and sold. The securities contracts (regulation)
Act , 1956 defines a Stock Exchange as “ an association, oragnisation, or body of
individuals, whether in corporated or not, established for the purpose of assisting
regulating and controlling of business in buying, selling and dealing in securities. “
Let us take an example for a better understanding of how market forces determine stock
prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an
upward movement in its stock price.
More and more people would want to buy this stock (i.e. high demand) and very few
people will want to sell this stock at current market price (i.e. less supply). Therefore,
buyers will have to bid a higher price for this stock to match the ask price from the seller
which will increase the stock price of ABC Co. Ltd. On the contrary, if there are more
sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co.
Ltd. in the market, its price will fall down.
In earlier times, buyers and sellers used to assemble at stock exchanges to make a
transaction but now with the dawn of IT, most of the operations are done electronically
and the stock markets have become almost paperless. Now investors dont have to
gather at the Exchanges, and can trade freely from their home or office over the phone
or through Internet.

The Role of the Stock Market in Economic Development

The Stock Exchanges in India as elsewhere have a vital role to play in the
development of the country in general and industrial growth of companies in the
private sector in particular and helps the Government to raise internal resources
for the implementation of various development programmes in the public sector.
As a segment of the capital market it performs an important function in mobilizing
and channelising resources which remain otherwise scattered. Thus the Stock
Exchanges tap the new resources and stimulate a broad based investment in the
capital structure of industries.
A well developed and healthy stock exchange can be and should be an important
institution in building up a property base along with a socialist in India with broader
distribution of wealth and income. Thus Stock Exchange is a vital organ in a
modern society. Without a stock exchange a modern democratic economy cannot
exist. The system of joint stock companies financed through the public investment
as emerged has put the vast means of finances almost to enterpreneurs' needs.
Finance from external sources mainly from the investing public can become
possible only when an institute like Stock Exchange provides opportunities for the
conversion of scattered savings into profitable investments with the promises of a
reasonable yield and minimum element of risk. Such a mechanism as provided by
Stock Exchanges is not merely a source of capital but also a conduit which
channelises the savings into investment along with a free movement of capital.
With the probable exception of a totalitarian state no Government will be able to
mobilize resources from the public if the money market in the form of stock
exchange does not exist.
The Stock Exchange benefits the entire community in a variety of way. It enables
the producers to raise capital which directly and indirectly gives gainful
employment to millions of people on the one hand and helps consumers to get ;the
variety of goods needed by them on the other. It provides opportunities to savers
to store the value either as temporary abode of purchasing power or as a
permanent abode of purchasing power in the form of financial assets. It also helps
the segments of the savers who put their savings in commercial firms and non-
banking financial intermediaries because these institutions avail themselves of the
services of Stock Exchange to invest the money thus collected.

The role of the stock market in economic development is primarily to channel capital
into businesses. The continuous flow of capital gives businesses the liquidity they need
to work and expand. To facilitate the flow of money, stock markets commonly consist of
national and regional stock exchanges where companies find investors for their stock. In
turn, investors seek the best investment opportunity to generate the highest returns on
their capital.

Opportunity Cost

Individual investors weigh opportunity cost when they examine the possible losses
and gains from all their investment options in the stock market. Generally, individuals
put money in stocks believed to maximize returns on their capital more than any
other stock or investment alternative. This principle helps channel capital into
specific companies, industries, or funds believed to yield the highest return. This in
turn supports economic development because investors make decisions based on
which stock is likely to generate greater returns.

Efficiency

On a large scale, investors making investment decisions that maximize their capital
help foster efficiency in the economy. As a result of maximization, capital flows on a
large scale toward companies judged to be in the best position to manage scarce
resources and generate profits. In contrast, companies that are not judged to be
profitable and are ineffective resource managers are forced to be efficient or leave
the marketplace. This large scale, profit maximizing behavior by stock market
investors helps promote business growth, employment and generates wealth.

Individuals

When good investment decisions channel money into the most promising
businesses, there are tangible economic benefits to individuals. For example, when
investors buy stock, they gain partial ownership in the company selling the stock on
the market. As a result, the company has funds to finance current operations and
 future expansion. Therefore, the company maintains its pool of employees who in
turn have the money to spend on consumer goods, education and home mortgages,
among other types consumer spending.

Businesses

Likewise, when businesses raise money by issuing securities in the stock market,
they are able to finance ongoing business activity and expansion. Generally, when
businesses expand, their operation costs increase, which generates derivative
economic benefits such as increased revenue for suppliers. Business expansions
also commonly generate additional jobs to support the increase in operations. As a
result, higher employment rates commonly generate higher consumer spending
levels.

Government

Local, state and federal governments all benefit from the role of the stock market in
economic development. Specifically, government benefits from bond issues and
increased corporate tax revenue. For instance, a business that grows from raising
money in the stock market through the sale of stock generates more income and
pays more corporate tax depending on the structure of the corporation. In addition,
bonds sold through the stock market help government agencies borrow money from
investors in return for regular interest payments to the investor. Money raised
through taxation and bonds helps fund government programs, services, roads,
schools, and higher education loans, among other spending.

FUNCTIONS
 Provide a ready market for buying and selling of securities.
 Performs an act of magic as it enables long term investments to be financed
by funds provided by individuals who are otherwise interested in short term or
medium term investment.
 Directs the flow of capitals in the most profitable channels.
 Induces corporate enterprises to raise their standards of performance.
 Offers an easily understood evaluation of the financial conditions and
prospects of listed firms.
 Facilitates speculation.
 Promotes the habit of saving and investment among the general public and
thereby helps capital formation.
 Promotes industrial growth and economic development of the country by
encouraging industrial investments rather than hoarding or investing in gold.
Because of its functions, the stock exchange is regarded as an essential eoncitant
of the capitalist system of economy. It is indispensable for the proper functioning
of an corporate enterprise. It brings together large amount of capital necessary for
the economic progress of a country. It is the citadel of capital and the pivot of the
money market. It provides necessary mobility to the capital and directs the flow of
capital into profitable and successful enterprise. It is the barometer of general
economic progress in a country and exercise a powerful and significant influence
as a depressant or stimulant of business activity.
BENEFITS
 Benefits to the community:-
- Stock exchange encourages people to save and invest their savings in shares
and debentures. The recent boom in shares market has created financial
awareness among the middle class. The stock market has become a central
factor in household financial planning.
- By encouraging people to save and invest, the stock market helps capital
formation which is an essential ingredients fir quicker industrial
development.
- Through capital formation, the stock market enables companies to
undertake expansion and modernization schemes. Every company talks in
terms of hundreds of crores of rupees of investments in new projects these
days. The stock markets is an Alibaba Cave from which business
community can draw unlimited money.
- Stock markets encourage several closely held companies to go public. This
means that ownership is broad-based management is diffused and more
scrips are offered to the public for trading.
- Superior performance of companies is reflected through stock market.
Companies with a proven track record are considered to be blue chip
companies and their shares and debentures are brisky traded in the share
markets.
- Stock market provides a market for the government to sell its securities
order to raise funds for meeting developmental activities.
- Stock market acts as a mirror which the general economic condition is
clearly reflected.
When an efficiently run company issues shares or debentures the to public for
subscription, there is a tremendous response from investors. A sort of record was
established by Kinetic Honda when its issue was over subscribed by 150 times.
Hero Honda Motors was offered Rs. 46.8 crore for an offer of just Rs. 4.46 crore.
The role of share bazaars is no less in the unbelievable response.

 Benefits of Investors:-
- Stock exchange is a money spinners an EI Dorado for millions of investors
across the country . Investors become overnight rich thanks to the stock
market “Bimal jain ” a new Delhi housewife writes India today bought 500
debentures of reliance textiles as year ago at the then market price of Rs.
92. the company then offered to convert these into shares, which are ruling
at record levels, jains initial investment of Rs. 46000 is now wroth Rs. 1.56
lakh in barely a year.
- Stock market offers a ready markets for buying and selling the securities.
Share bazaar is the busiest market with crores of rupees being put a stake.
The Bombay stock exchange , the premier share market registers dealings
worth several hundreds crore a day.
- The interest of investors is safeguard by the strict enforcement of rules and
regulations. Every share market has its own by laws besides complying
with the provisions of the securities contracts Act 1956. By-laws and
provisions of the legislation protect the interests of investors , big or small.
- The stock exchange provides information about the scrips dealt therein and
the prices at which they are quoted. All newspaper and periodicals carry
columns on the stock markets. This enables investors in making a sound
investment choice.
- More important is the fact that the stock market is a powerful hedge against
inflation.
 Benefits to Companies:-
- Wide market for shares and debentures.
- Image of the company goes up once the shares are listed on a stock market.
- Quicker response from the investors to the listed securities.
- The market rates of shares and debentures will be higher because of daily
dealings on the stock markets. This enhances the bargaining position of a
company in the event of its merger with some other company.

Task2

Monatry policy

The Monetary is the policy statement, traditionally announced twice a year, through
which the Reserve Bank of India seeks to ensure price stability for the economy.

These factors include - money supply, interest rates and the inflation. In banking and
economic terms money supply is referred to as M3 - which indicates the level (stock) of
legal currency in the economy

When is the Monetary Policy announced?

Historically, the Monetary Policy is announced twice a year - a slack season policy
(April-September) and a busy season policy (October-March) in accordance with
agricultural cycles. These cycles also coincide with the halves of the financial year.

Initially, the Reserve Bank of India announced all its monetary measures twice a year in
the Monetary and Credit Policy. The Monetary Policy has become dynamic in nature as
RBI reserves its right to alter it from time to time, depending on the state of the
economy.

The Monetary Policy regulates the supply of money and the cost and availability of
credit in the economy. It deals with both the lending and borrowing rates of interest for
commercial banks.

The Monetary Policy aims to maintain price stability, full employment and economic
growth.

The Reserve Bank of India is responsible for formulating and implementing Monetary
Policy. It can increase or decrease the supply of currency as well as interest rate,

What are the objectives of the Monetary Policy?

The objectives are to maintain price stability and ensure adequate flow of credit to the
productive sectors of the economy.

Stability for the national currency (after looking at prevailing economic conditions),
growth in employment and income are also looked into. The monetary policy affects the
real sector through long and variable periods while the financial markets are also
impacted through short-term implications.

How does the Monetary Policy affect the domestic industry and exporters in
particular?

Exporters look forward to the monetary policy since the central bank always makes an
announcement on export refinance, or the rate at which the RBI will lend to banks which
have advanced pre-shipment credit to exporters.

A lowering of these rates would mean lower borrowing costs for the exporter.
Some Monetary Policy terms:

Bank Rate

Bank rate is the minimum rate at which the central bank provides loans to the
commercial banks. It is also called the discount rate.

Usually, an increase in bank rate results in commercial banks increasing their lending
rates. Changes in bank rate affect credit creation by banks through altering the cost of
credit.

Cash Reserve Ratio

All commercial banks are required to keep a certain amount of its deposits in cash with
RBI. This percentage is called the cash reserve ratio.

Inflation

Inflation refers to a persistent rise in prices. Simply put, it is a situation of too much
money and too few goods. Thus, due to scarcity of goods and the presence of many
buyers, the prices are pushed up.

The converse of inflation, that is, deflation, is the persistent falling of prices. RBI can
reduce the supply of money or increase interest rates to reduce inflation.

Money Supply (M3)

This refers to the total volume of money circulating in the economy, and conventionally
comprises currency with the public and demand deposits (current account + savings
account) with the public.
The RBI has adopted four concepts of measuring money supply. The first one is M1,
which equals the sum of currency with the public, demand deposits with the public and
other deposits with the public. Simply put M1 includes all coins and notes in circulation,
and personal current accounts.

The second, M2, is a measure of money, supply, including M1, plus personal deposit
accounts - plus government deposits and deposits in currencies other than rupee.

The third concept M3 or the broad money concept, as it is also known, is quite popular.
M3 includes net time deposits (fixed deposits), savings deposits with post office saving
banks and all the components of M1.

Statutory Liquidity Ratio

Banks in India are required to maintain 25 per cent of their demand and time liabilities in
government securities and certain approved securities.

These are collectively known as SLR securities. The buying and selling of these
securities laid the foundations of the 1992 Harshad Mehta scam.

Repo

A repurchase agreement or ready forward deal is a secured short-term (usually 15

days) loan by one bank to another against government securities.

Legally, the borrower sells the securities to the lending bank for cash, with the
stipulation that at the end of the borrowing term, it will buy back the securities at a
slightly higher price, the difference in price representing the interest.

Open Market Operations

An important instrument of credit control, the Reserve Bank of India purchases and sells
securities in open market operations.

In times of inflation, RBI sells securities to mop up the excess money in the market.
Similarly, to increase the supply of money, RBI purchases securities.

On the basis of the current assessment the Reserve Bank announces the
following policy measures:

Bank Rate

   The Bank Rate has been retained at 6.0 per cent.

Repo Rate

    The repo rate has been retained at 5.75 per cent.

Reverse Repo Rate

   The reverse repo rate has been retained at 4.5 per cent.

Cash Reserve Ratio

Cash reserve ratio has been retained at 6%.

SLR

SLR has been retained at 25 per cent.

RBI's Monetary Policy for 2009-10

(RBI) for 2009-10 has a few important initiatives like change in the Repo (Repurchase)
and Reverse Repo (Repurchase) Rates.

It has not made any changes in other instruments like Cash Reserve Ratio, Statutory
Liquidity Ratio, and Bank Rate because three stimulus packages have already been
launched by the Government, and as such, it has to strike a trade-off between higher
and lower liquidity to stabilize the economy in all respects.

Whatever it is, this package will surely give another boost to the economy to get out of
the on-going recession. Here is the package:

1. Reduction in the Repo (Repurchase) Rate by 25 basis to 4.75 per cent. The Repo
Rate is the rate at which the RBI lends to the banks. This reduction would make
borrowing by banks cheaper and will, thus, infuse more money (liquidity) in the
economy.

2. Reduction in the Reverse Repo (Repurchase) Rate by 25 basis points to 3.25 per
cent. The Reverse Repo Rate is the exact opposite of Repo Rate. This is the rate at
which the RBI borrows from the banks. This reduction will help banks keep their money
with them and not with the RBI and this will once again pump in more money in the
economy.

3. No change in the Cash Reserve Ratio, which is 5 per cent. This ratio refers to a
portion of deposits which banks have to keep with the RBI as liquid cash. This serves
two purposes. It ensures that a portion of the bank’s deposits is totally risk-free and,
secondly, it enables the RBI to control liquidity in the system and, thereby, inflation by
tying their hands against lending money.

4. No change in the Statutory Liquidity Ratio (SLR), which will stay at 24 per cent.
Besides the CRR, banks are required to invest a portion of their deposits in government
securities as a part of their SLR requirements. What SLR does is again restrict the
bank’s ability to pump more money into the economy.

5. No change in the Bank Rate which will stay at 6 per cent. Bank Rate is the rate at
which RBI lends money to other banks or financial institutions. This rate signals the
RBI’s long-term outlook on interest rates.

This package will surely ensure a policy regime that would enable credit expansion on
the one hand, and would preserve credit quality on the other so that the economy gets
back to the right growth path.

As it is predicted, the GDP growth rate for 2009-10 will be around 6 percent. It will help
the financial sector come up. It will also help the aggregate demand to accelerate and,
thus, boost the flow of credit to all productive sectors including the most important
informal sector which is the greatest strength of our economy in terms efficiency and
also in terms of employment creation.

Besides, the following steps would be taken to help the financial sector come up:

1. Further liberalization of the FCCBs (Foreign Currency Convertible Bonds) buyback

policy. The FCCB is a type of convertible bond issued in a currency different than the
issuer’s domestic currency. In other words, the money being raised by the issuing
company is in the form of a foreign currency. A convertible bond is a mix between a
debt and an equity instrument. It acts like a bond by making regular coupon and
principal payments but these bonds also give the bondholder the option to convert the
bond into a stock.

2. Extension of the relaxation on the all-in-cost ceilings for ECBs (European Central
Banks) up to the end of the year 2009.
3. Extension of the special refinance facility and term Repo facility and increased limit
for export credit refinance for banks up to the end of the financial year 2009-2010.

Conclusion:-