TITLE OF THE PROJECT

:

“THE BEHAVIOUR OF INDIAN STOCK MARKET”
REPORT SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT FOR POST GRADUATE PROGRAMME IN MANAGEMENT BYAMAL SAIKIA REGISTRATION NUMBER: EIILM/PGP/08-09/4H007 SESSION: 2008-2010 August, 2009 UNDER THE GUIDANCE OF Mr. Subhendu Mookherjee Regional Head, West Bengal & Prof. Abhijit Chakrabarty Faculty, EIILM, Kolkata

EASTERN INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT 6, WATERLOO STREET, KOLKATA – 700069

THE BEHAVIOUR OF INDIAN STOCK MARKET

Acknowledgement

For me, acknowledgement is a genuine opportunity to express my sincere thanks to all those who have supported and encouraged me in the completion of the project. First of all, my sincere gratitude is extended to Mr. Subhendu Mookherjee (Regional Head, KARVY Stock Broking Ltd., West Bengal), my external guide, for his guidance and immense support for the completion of the project. I further express my sincere thanks and indebtness to Ms. Mohua Chatterjee, Branch Head, Dalhousie Branch and Mr. Amit Sonthalia, Branch Head, Phoolbagan Branch, Kolkata (KARVY) who in spite of having a very busy schedule helped me immensely. I express my deep sense of regards to Prof. Abhijit Chakrabarty, (Faculty, EIILM, Kolkata) my guide in the institute for his valuable guidance and whole hearted support, which were of immense help for completing my project.

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Declaration The project report on “The Behaviour of Indian Stock Market” at KARVY Stock Broking Ltd. is submitted by me in partial fulfillment of the requirement for MBA from EIILM, is an original work of mine.

I declare that this project has not been published previously elsewhere; it is a result of my own efforts and has been taken solely for the academic purposes. All educational materials consulted in the course of study have been declared in the Reference and all information provided in the project is true to the best of my knowledge.

I have done this work independently under the guidance of Prof. Abhijit Chakrabarty my guide in the institute. This work has not been submitted in full or part to any institute or university for the award of any degree /diploma.

________________ Amal Saikia

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TABLE OF CONTENTS

TITLE OF THE PROJECT:.........................................................................................1 “THE BEHAVIOUR OF INDIAN STOCK MARKET”.........................................................1 Acknowledgement....................................................................................................2 Declaration...............................................................................................................3 1.Company Profile:...................................................................................................6 ............................................................................................................................. 7 KARVY STOCK BROKING PRIVATE LIMITED............................................................7 2.Introduction:........................................................................................................11 3.Objective:............................................................................................................12 4.Methodology:.......................................................................................................13 4.1Data Collection:..............................................................................................13 5.Data Projection and Analysis:..............................................................................14 5.1STOCK MARKET:.............................................................................................14 Function and purpose..........................................................................................14 Stock market investment:...................................................................................15 Main Participants of the Stock market.................................................................15 5.2 Functioning of the Stock Market....................................................................15 Contribution of Stock Market...............................................................................16 5.3 Stock Market and Economic Growth:.............................................................16 5.4 Stock Market in India: ...................................................................................17 POST-REFORMS STOCK MARKET SCENARIO:.......................................................17 How Stock Exchanges Operate:..........................................................................19 Pattern of Growth of Stock Exchange:.................................................................19 5.5Bombay Stock Exchange (BSE):.....................................................................21 5.6SENSEX - The Barometer of Indian Capital Markets.......................................22 Companies Listed in the Sensex:........................................................................22 4

THE BEHAVIOUR OF INDIAN STOCK MARKET

Sensex milestones:.............................................................................................24 Graphical Presentation: ......................................................................................26 ............................................................................................................................ 26 May 2009............................................................................................................ 26 Sensex falls:........................................................................................................ 26 The top 18 single-day falls of the Sensex have occurred on the following dates: ............................................................................................................................ 26 Major crashes since 2000:......................................................................................27 May 2006......................................................................................................... 27 Effects of the subprime crisis in the U.S. :........................................................27 January 2008....................................................................................................27 Gigantic drops of the SENSEX in a day................................................................28 5.7Major Indian Stock Market Reforms:...............................................................28 Securities and Exchange Board of India (SEBI): .....................................................28 Over-the-Counter Exchange of India (OTCEI): .......................................................28 5.8National Stock Exchange (NSE):.....................................................................29 Index-based Market-wide Circuit Breakers:.........................................................33 5.9FOREIGN INSTITUTIONAL INVESTMENTS AND THE INDIAN STOCK MARKET:. .33 FIIs Flows: ........................................................................................................... 33 6.Market Trend:......................................................................................................35 Where Did the Terms Come from?......................................................................36 Characteristics of a Bull and Bear Market:..........................................................36 6.1 BULL MARKET: ..............................................................................................37 Features of Bull market:......................................................................................38 Existence Period of Bull market:..........................................................................39 Factor responsible for Bull Market:......................................................................39 Bull Market Strategy:...........................................................................................40 6.2 BEAR MARKET:..............................................................................................41 Factors Responsible For Bear Market:.................................................................42 7.Volatility:.............................................................................................................44 RETURNS IN BULL PHASE AND BEAR PHASE:......................................................47 Analysis: ............................................................................................................. 48 8.Findings:..............................................................................................................49 Factors responsible for Volatility:........................................................................49 5

THE BEHAVIOUR OF INDIAN STOCK MARKET

9.Recommendtions:...............................................................................................50 10.Conclusion:........................................................................................................51 11.Limitations:........................................................................................................52 12.References:.......................................................................................................53 13.Annexure:..........................................................................................................55

1. Company Profile:
KARVY STOCK BROKING LTD KARVY is one of the premier integrated financial intermediaries in the country, which is into businesses such as Merchant Banking, Stock Broking, Depository Participant Services, Financial Products Distribution, Mutual Fund Servicing and Registrar and Transfer Agents. It’s a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate. Karvy covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products – mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity and IPOs.
BACKGROUND

In 1982, a group of Hyderabad-based practicing Chartered Accountants started Karvy Consultants Limited with a capital of Rs.1,50,000 offering auditing and taxation services initially. Later, it forayed into the Registrar and Share Transfer activities and subsequently into financial services. All along, Karvy’s strong work ethic and professional background leveraged with Information Technology enabled it to deliver quality to the individual. A decade of commitment, professional integrity and vision helped Karvy achieve a leadership position in its field when it handled the largest number of issues ever handled in the history of the Indian stock market in a year. Thereafter, Karvy made inroads into a host of capital market services, corporate and retail, which proved to be a sound business synergy. The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company Karvy Consultants Limited. It started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, it has utilized its experience and superlative expertise to go from strength to strength, to better its services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of India’s premier integrated financial service enterprise. Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services.

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The business of KCL includes:
    

Equity services. Mutual Funds Services. Insurance advisory. Tax Advisory. Home Loans.

THE KARVY CREDO  “Our Clients. Our Focus

Clients are the reason for our being.” Personalized service, professional care; pro-activeness are the values that help the organisation nurture enduring relationships with clients.
 Respect for the individual Each and every individual is an essential building block

of the organization.  Teamwork None of us is more important than all of us  Responsible Citizenship A social balance sheet is as rewarding as a business one. As a responsible corporate citizen, Karvy’s duty is to foster a better environment in the society where we live and work. Abiding by its norms, and behaving responsibly towards the environment, is some of our growing initiatives towards realizing it.

KARVY STOCK BROKING PRIVATE LIMITED
Member- Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Hyderabad Stock Exchange (HSE). Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freel towards attaining diverse goals of the customer through varied services, creating a plethora of opportunities for the customer by opening up investment vistas backed by researchbased advisory services. Here, growth knows no limits and success recognizes no boundaries.

Stock broking services
It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth management and wealth accumulation option. The difference between unpredictability and a safety anchor in the market is provided by in-depth knowledge of market
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functioning and changing trends, planning with foresight and choosing one option with care. This is what it provides in the Stock Broking services. It offers services that are beyond just a medium for buying and selling stocks and shares, rather services which are multi dimensional and multi-focused in their scope. There are several advantages in utilizing its Stock Broking services, which are the reasons why it is one of the best in the country. Karvy offers trading on a vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. More importantly, it makes trading safe to the maximum possible extent, by accounting for several risk factors and planning accordingly. This crucial information is given as a constant feedback to the customers, through daily reports delivered thrice daily The Pre-session Report, where market scenario for the day is predicted.  The Mid-session Report, timed to arrive during lunch break, where the market forecast

for the rest of the day is given and
 The Post-session Report, the final report for the day, where the market and the report

itself is reviewed. To add to this repository of information, it publish a monthly magazine; Karvy, The Finapolis, which analyzes the latest stock market trends and takes a close look at the various investment options, and products available in the market, while a weekly report, called; Karvy Bazaar Baatein, keeps the investors more informed on the immediate trends in the stock market. In addition, the specific industry reports give comprehensive information on various industries. Besides this, it also offer special portfolio analysis packages that provide daily technical advice on scrip for successful portfolio management and provide customized advisory services helping to make the right financial moves that are specifically suited to the concern portfolio. Karvy’s Stock Broking services are widely networked across India, with the number of trading terminals providing retail stock broking facilities. To empower the investor further the company has made serious efforts to ensure that our research calls are disseminated systematically to all our stock broking clients through various delivery channels like email, chat, SMS, phone calls etc. Its foray into commodities broking has been path breaking and we are in the process of converting existing traders in commodities into the more organized mainstream of trading in commodity futures, both as a trading and risk hedging mechanism.

Depository participants
The onset of the technology revolution in financial services Industry saw the emergence of Karvy as an electronic custodian registered with National Securities Depository Ltd (NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards enabling further comfort to the investor by promoting paperless trading across the country and emerged as the top 3 Depository Participants in the country in terms of customer service. Offering a wide trading platform with a dual membership at NSDL and CDSL, Karvy is a powerful medium for trading and settlement of dematerialized shares. www.karvydp.nic.in

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Distribution of Financial Product
The paradigm shift from pure selling to knowledge based selling drives the business today. With the wide portfolio offerings, it occupies all segments in the retail financial services industry. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery. This has propelled to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized, besides being established as the leading procurer in all public issues. To further tap the immense growth potential in the capital markets we enhanced the scope of the retail brand, Karvy – the Finapolis, thereby providing planning and advisory services to the mass affluent. http://mfportfolio.karvy.com/

Advisory Services
Under the retail brand ‘Karvy – the Finapolis', it deliver advisory services to a cross-section of customers. The service is backed by a team of dedicated and expert professionals with varied experience and background in handling investment portfolios. They are continually engaged in designing the right investment portfolio for each customer according to individual needs and budget considerations with a comprehensive support system that focuses on trading customers' portfolios and providing valuable inputs, monitoring and managing the portfolio through varied technological initiatives. www.the-finapolis.com

Private client group
This specialized division was set up to cater to the high net worth individuals and institutional clients keeping in mind that they require a different kind of financial planning and management that will augment not just existing finances but their life-style as well. For this purpose it offer a comprehensive and personalized service that encompasses planning and protection of finances, planning of business needs and retirement needs and a host of other services, all provided on a one-to-one basis.

Quality Policy
To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations. Quality Objectives As per the Quality Policy, Karvy will:

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 Build in-house processes that will ensure transparent and harmonious relationships  


   

with its clients and investors to provide high quality of services. Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers. Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customer's needs. Continue to uphold the values of honesty & integrity and strive to establish Unparalleled standards in business ethics. Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients. Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of it. Strive to keep all stake-holders (shareholders, clients, investors, employees, Suppliers and regulatory authorities) proud and satisfied.

Karvy has always believed in adding value to services it offers to clients. A top-notch research team based in Mumbai and Hyderabad supports its employees to advise clients on their investment needs. On a typical working day Karvy: Has more than 25,000 investors visiting our 575 offices. Publishes / broadcasts at least 50 buy / sell calls. Attends to 10,000+ telephone calls. Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises, allotment / refund advises.  Executes 150,000+ trades on NSE / BSE.  Executes 50,000 debit / credit in the depositary accounts.  Advises 3,000+ clients on the investments in mutual funds.
   

Achievements:
        

Among the top 3 stock brokers in India (4% of NSE volumes). India's No. 1 Registrar & Securities Transfer Agents. Top most Depository Participants. Largest Network of Branches & Business Associates. ISO 9002 certified operations by DNV. Among top 10 Investment bankers. Largest Distributor of Financial Products. Adjudged as one of the top 50 IT uses in India by MIS Asia. Full Fledged IT driven operations.

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2. Introduction:
Stock prices change everyday in the market. Buyers and sellers cause prices to change as they decide how valuable each stock is. Basically, share prices change because of supply and demand. If more people want to buy a stock, then the price of that stock moves up. Conversely, if more people want to sell a stock, there would be more supply (sellers) than demand (buyers), the price would start to fall. In financial term, this is called as Volatility. Volatility is a symptom of a highly liquid stock market. Pricing of securities depends on volatility of each asset. An increase in stock market volatility brings a large stock price change of advances or declines. Investors interpret a raise in stock market volatility as an increase in the risk of equity investment and consequently they shift their funds to less risky assets. Technically, volatility is found by calculating the "standard deviation" of the daily change in price. If the price of an investment moves up and down by large percentage amounts, and in short periods of time, it has high volatility. If the price almost never changes, or only by very small amounts, then it has very low volatility. It has an impact on business investment spending and economic growth through a number of channels. Changes in local or global economic and political environment influence the share price movements and show the state of stock market to the general public. The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the investors. So, over- reactions and wrong speculation can give rise to irrational behavior of the Stock Market. Excessive optimistic speculation of future prospects can raise the prices of stocks to an extreme high and excessive pessimism on the part of the investors can result in extremely low prices. Stock Market behavior is also affected by the psychology of “Group Thinking”. The thinking of a majority group of people many times influences others to think in the same line and the Stock Market behavior gets naturally affected. Sometimes the Stock Market behavior is affected by rumors and mass panic. The prices of the stocks fluctuate tremendously by the economic use even if it has nothing to done with values of stocks and securities. So, it is extremely difficult to make predictions about the Stock Market and the inexperienced investors who are not that much interested in financial analysis of stocks; rarely get the financial assistance from the Stock Market at the time of need.

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3. Objective:
Share in the market offer a high capital appreciation but the movement of the share price is always like a wave and tide motion of the sea. Volatility in the stock return is an integral part of stock market with the alternating bull and bear phases. In the bullish market, the share prices soar high and in the bearish market share prices fall down and these ups and downs determine the return and volatility of the stock market. Volatility is a symptom of a highly liquid stock market. Pricing of securities depends on volatility of each asset. It has an impact on business investment spending and economic growth through a number of channels. Changes in local or global economic and political environment influence the share price movements and show the state of stock market to the general public. The issues of return and volatility have become increasingly important in recent times to the Indian investors, regulators, brokers, policy makers, dealers and researchers with the increase in the FIIs investment. Hence an analysis has been made to know the volatility trend in the Indian stock market and the reasons for the bear and bull trend in the market. Nifty and Sensex are taken as representative of Indian markets. This project gave me opportunity to have an idea about volatility in stock market. This gave me idea about and fundamental analysis in stock market and how trading is being done in stock market. The objectives of the project can be mentioned as below:
 To study volatility in Indian stock market while taking SENSEX of Bombay stock


  

exchange as a source of secondary data which broadly represent Indian stock market along with NIFTY of National Stock Exchange. To study the factors which are making Indian stock market volatile. Build understanding of central ideas of stock market. Develop familiarity with the analysis of stock market. Furnish institutional material relevant for understanding the environment in which trading decisions are taken. Understanding of Bull Market and Bear Market.

This project will be helpful to know volatility in Indian Stock Market and reasons for such high volatility and would be able to take decisions for investment in volatile stock market.

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4. Methodology:
Methodology means the methods, processes or tools used in driving the project. At the very biggining, an overview of the stock market is given. The level of SENSEX at various points of time and causes for the same is given. Some graphs and tables also used here. Bull market and Bear market have been broadly described in the report. Volatility of Indian stock market is analysed through graph and table. The returns in bull and bear phase are also given. Hence an analysis has been made to know the volatility trend in the Indian stock market and the reasons for the bear and bull trend in the market.

4.1

Data Collection:

All the data are collected from secondary source, i.e, magazines, newspapers, websites etc. Data were collected from BSE Sensex and NSE Nifty. Sensex is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. Due to its wide acceptance amongst the Indian investors, sensex is regarded the pulse of the Indian stock market. Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy. Hence these two indices were taken for the study.

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

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

Stock market investment:
Stock Market Investment refers to the investment in the market; where exchange of company stocks or collective shares of the companies and other kinds of securities and derivatives takes place. Stocks are traded in Stock Market by the help of Stock Exchange. The Stock Exchange brings the sellers and buyers of stocks and securities under same roof. The available stocks are listed and traded in the Stock Exchange among the buyers and the sellers. Proper investment in Stock Market essentially requires detailed knowledge of Stock Market, its’ participants, knowledge about the functioning, behavior and contribution of the stock market. Main Participants of the Stock market The main participants of Stock Market are the individual investors, banks, insurance companies, mutual funds and pension funds. Since, markets of today have turned more “institutionalized”, the largest share of the market participation comes from the large institutions rather than individual rich investors.

5.2

Functioning of the Stock Market

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

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Contribution of Stock Market Stock Market is the best medium of raising funds. Businesses which need financing for expansion or improvement can easily raise required capital by participating in Stock Market. On the other hand, for the investors; investing in stocks is a better option than investing in property or real estate as the stocks contain more liquidity than any other property. This means, stocks can be sold more easily and quickly than any other property and so, the investors can get their money back by selling the stocks anytime they need. The prices of stocks or shares in the Stock Market have strong effects on the economy in various ways. Prices of stock influence business investment, individual household consumption and wealth of individual households. For this deepening effect, Central banks of each country keep a track of the Stock Market activities. A proper functioning of Stock Market in a country can result in low costs, increased production of goods and services and increased level of employment. In this way, an efficient Stock Market can contribute to economic growth of the country.

5.3

Stock Market and Economic Growth:

A country’s economic growth is largely associated with the changing dynamics of its stock market. Since Independence, Indian stock market has been incessantly growing. Many government norms and regulations have been formulated so as to keep the market free from trickery and deception. In spite of all these norms and regulations, Indian Stock market could not be totally sterilized from scams; even through the performance was quite noticeable. But the market got a boost after the financial reforms which opened the doorway for FII inflow. Economic growth of the nations is closely linked with the liquidity of the stock market existing in the country. The concept of liquidity that is dealt here is market liquidity, which stands in sharp contrast to the definition of liquidity from the point of view of a firm. The stock markets around the globe contribute to the economic development by imparting liquidity to the capital investments. It is this market that allows entry even to the small savers, who invests their savings for short peroids. The liquidity of the stock market enables them to sell off their shares easily within a short span of time, which has undoubtedly attracted investments in shares. However, the most profitable business requires long-term investments. When the small potential investors reach the comfort zone in terms –term of investing in long-term equities, they balance their portfolios more towards long-term investments. This balancing mechanism forces the financial units to shift towards more profitable, productive and long-term products, resulting in higher capital productivity. The higher-productivity capital boosts economic growth and raises the returns on equity investment, which further increases the incentives to save and invest and hence, furthers economic growth. So, we have to focus on the linkage between the stock market and economic growth. On the positive side, a well-functioning stock market helps in developing the economy through the growth of savings, efficient allocation of investment resources and better utilization of the existing resources. However, on the otherhand, the analysts view stock market as a place, where the owners buy and sell stocks according to their convenience. This often affects the profitability of the firms by affecting the funds available to them. In this processs, economic
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growth gets hampered due to the volatile nature of the stock market. Hence, the aspect of volatity needs to be addressed.

5.4

Stock Market in India:

The origin of the stock market in India dates back to the end of the eighteenth century when long-term negotiable securities were first issued. The real beginning, however, occurred in the middle of the eighteenth century, after the enactment of the companies Act in 1850 which introduced the feature of limited liability, and generated investor interest in corporate securities. The stock market is also known as secondary market. In India, the secondary market consists of recognized stock exchanges operating under rules, by-laws and regulations duly approved by government. These stock exchanges constitute an organized market where securities issued by the central and state governments, public bodies, and joint stock companies are traded. A stock exchange is defined under Section 2(3) of the Securities Contracts (Regulation) Act, 1956, “as any body of individual whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.” Thus, astock exchange, (formerly a securities exchange) is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds. Everyday, stocks are exchanged and traded in numerous stock markets around the world. The liquidity they bring a vital component of economic growth. Stock exchanges are open markets that trade financial assets. Whether associated with a company or acting as an individual, a stock exchange is the place where stocks are bought and sold. There are a number of major stock exchanges around the world and each of these plays a part in determining the overall financial and economic condition of any economy. Stock exchanges deal with a number of financial instruments such as stocks, bonds and equities. Both corporate and government bonds are traded in stock exchanges. Equities include popular investment options, rights issues, bonus issues, and all other forms of shares and stocks. The actual trading of stocks takes place through mediators such as financial advisors, brokerage houses, and stockbrokers.

POST-REFORMS STOCK MARKET SCENARIO: After the initiation of reforms in 1991, the Indian stock market now has a three-tier form:
 Regional stock exchanges. 17

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 The National Stock exchange (NSE).  The Over the counter exchange of India (OTCEI). The NSE was set up in 1994. It was the first modern stock exchange to bring in new technology, new trading practices, new institutions, and new products. The OTCEI was set up in 1992 as a stock exchange providing small and medium-sized companies the means to generate capital.

The Organizational forms of the various recognized stock exchanges in India as follows:
 Mumbai, Ahmedabad, Patna, Indore ----------- Voluntary non-profit making.

 Kolkata, Delhi, Bangalore, Cochin, Kanpur, Guwahati, Ludhiana, Chennai------------ Public limited company.
 Hyderabad, Pune, Rajkot, Magadh ----------------Company by gurantee.  The National Stock Exchange -----------------------A tax-paying company incorporated

under the Companies Act and promoted by leading financial institutions and banks.
 The Over the Counter Exchange Of India ----------A company under Section 25 of the

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

The role of stock exchanges:
Stock exchanges have multiple roles in the economy, this may include the following:      

Raising capital for businesses. Mobilizing savings for investment. Facilitating company growth. Redistribution of wealth. Corporate governance. Creating investment opportunities for small investors. Barometer of the economy.

Pattern of Growth of Stock Exchange:

In the figure, we can see the growth of Indian Stock Exchanges. After independence, we had only 7 stock exchanges. The Calcutta Stock Exchange (CSE) was the largest stock exchange in India till 1960s. In order to promote the oderly development of the stock market, number of stock exchanges has been increased. Again, after the announcement of new economic policy in 1991, the number increase to 22. And, at present, there are 23 stock exchanges in India – 19 regional Stock Exchanges, BSE, NSE, OCTEI and the Interconnected Stock Exchange of India (ICSE).

How to find a good stock?
19

THE BEHAVIOUR OF INDIAN STOCK MARKET

There are some factors that can help predict whether a stock is good or questionable, and these can help one to determine the best stocks for his portfolio and needs. Some of ways to identify a good stock are mentioned below: CAPEX or Capital Expenditure: One way to identify a good stock is by looking at the CAPEX, or capital expenditure, compared to other similar stocks in the same industry. Make sure that the stocks being compared are from the same industry and that the companies are similar, otherwise the stock analysis will be inaccurate and the stock may not be such a good deal. Consumer stocks, such as Coca Cola and Nestle, usually have a minimum or low capital expenditure. Having a low capital expenditure means that the company uses their operating profits for investment funding instead of taking out loans that can have fluctuating interest rates and cost money. During an economic recession, low CAPEX stocks are a better bet than many from heavy industries because of the fluctuation of interest rates when the economy falls. Reliability: Finding a good stock also means looking at other factors; one of which is reliability. Choose stock in a company that has been shown to be reliable and that has a high potential for growth. Look at the price the stock is currently listed at and evaluate this price against the current company condition and the potential for future growth. This evaluation will help you determine whether the stock price is reasonable, which makes it a good stock, or if it is inflated compared to the current situation and conditions. Risk and the level of reward: The higher the risk, the better a reward is going to be if the stock performs well. One should determine what level of risk he is willing and can afford to take, and only choose stocks that reflect this risk level. There are many different formulas that can be used to try and place value on a stock, and each investor will be able to tell what formula they are most comfortable with in determining whether a stock is good or bad. High profit margin: A good stock should have a high profit margin. The profit margin of a company will alert you to vital information concerning the effectiveness of the current company management. A good management team will be able to reduce the operating costs of a company and at the same time increase revenue and possibly growth as well. When comparing and evaluating stocks, one should look at those with the highest profit margins. Any investment carries some risk, but choosing a good stock can minimize the risks of the investment and maximize the gains one will see. One should look for stocks that have gone down in price simply because of market conditions and not because of problems with the management or company. With the way the stock prices have dropped in the last six months, there are plenty of excellent stock choices available, and the prices are low simply because almost all stock prices have fallen and many investors wanted out of the market before it could
20

THE BEHAVIOUR OF INDIAN STOCK MARKET

crash. Some of these stocks represent a great investment opportunity because the price is good and the company is solid.

5.5

Bombay Stock Exchange (BSE):

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now spanning three centuries in its 133 years of existence. What is now popularly known as BSE was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is the first stock exchange in the country which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. It migrated from the open outcry system to an online screen-based order driven trading system in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatised and demutualised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With demutualisation, BSE has two of world's best exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners. Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an efficient access to resources. There is perhaps no major corporate in India which has not sourced BSE's services in raising resources from the capital market. Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion. An investor can choose from more than 4,700 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices. The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It brings to the investors a trading tool that can be easily used for the purposes of investment, trading, hedging and arbitrage. SPIcE allows small investors to take a long-term view of the market.

Awards:
• •

The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR). The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting.
21

THE BEHAVIOUR OF INDIAN STOCK MARKET

The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology

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

:1978-79 :100

: 01-01-1986  Method of : Launched on full market capitalization method and effective September 01, 2003, calculation method shifted to free-float calculation market capitalization. : 30  Number of scrips  Index calculation : 15 seconds frequency

Companies Listed in the Sensex: A list of BSE Sensex listed companies is given below which provides the full list of companies that have been part of the BSE Sensex since its inception in 1986 (baselined to 1979).

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THE BEHAVIOUR OF INDIAN STOCK MARKET

(As of January 12, 2009)
Code Name Sector Market Cap (Rs. In Crore) Weight in Index (%)

500410 500103 532454 532868 500300 500010 500180 500440 500696 532174 500209 500875 532532 500510 500520 532500 532555 500312 500359 532712 500325 500390 500112 500900

ACC BHEL Bharti Airtel DLF Universal Limited* Grasim Industries HDFC HDFC Bank Hindalco Industries Hindustan Lever Limited ICICI Bank Infosys ITC Limited Jaiprakash Associates Larsen & Toubro Mahindra & Mahindra Limited Maruti Udyog NTPC ONGC Ranbaxy Laboratories Reliance Communications Reliance Industries Reliance Infrastructure State Bank of India Sterlite Industries*

Housing Related Capital Goods Telecom Housing related Diversified Finance Finance Metal, Metal Products & Mining FMCG Finance Information Technology FMCG Housing Related Capital Goods Transport Equipments Transport Equipments Power Oil & Gas Healthcare Telecom Oil & Gas Power Finance Metal, Metal Products, and Mining

15,500.35 100,672.24 156,785.10 110,217.43 23,603.36 67,579.99 46,771.18 20,217.87 49,804.67 85,589.54 81,783.17 77,736.80 26,524.96 88,321.36 17,095.03 23,966.53 162,435.65 209,898.26 16.375.36 104,914.49 329,178.73 29,593.48 100,976.76 18,428.34

0.87 3.29 5.12 1.54 1.65 5.36 3.49 1.32 2.32 7.98 6.49 5.08 1.48 7.42 1.28 1.12 2.27 3.29 1.07 3.43 15.35 1.93 4.24 0.95

23

THE BEHAVIOUR OF INDIAN STOCK MARKET

524715

Sun Pharmaceutical Industries* Tata Consultancy Services Tata Motors Tata Power* Tata Steel Wipro

Healthcare

26,441.43

2.34

532540 500570 500400 500470 507685

Information Technology Transport Equipments Power Metal, Metal Products & Mining Information Technology

79,355.53 24,033.43 17,080.98 50,685.24 62,133.50

1.85 1.35 1.04 3.31 1.16

 DLF replaced Dr. Reddy's Lab on November 19, 2007.

 Sterlite Industries replaced Ambuja Cements on July 28, 2008.  Tata Power Company replaced Cipla Ltd. on July 28, 2008.  Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009.

Sensex milestones:
Here is a timeline on the rise and rise of the Sensex through Indian stock market history.

1000, July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for the first time and closed at 1,001 in the wake of a good monsoon and excellent corporate results. 2000, January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark and closed at 2,020 followed by the liberal economic policy initiatives undertaken by the then finance minister and current Prime Minister Dr Manmohan Singh. 3000, February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000 mark in the wake of the market-friendly Budget announced by Manmohan Singh. 4000, March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark and closed at 4,091 on the expectations of a liberal export-import policy. It was then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling. 5000, October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark as the Bharatiya Janata Party-led coalition won the majority in the 13th Lok Sabha election. 6000, February 11, 2000 - On February 11, 2000, the information technology boom helped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.
24

THE BEHAVIOUR OF INDIAN STOCK MARKET

7000, June 21, 2005 - On June 20, 2005, the news of the settlement between the Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy, Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000 points for the first time. 8000, September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's benchmark 30-share index – the Sensex - crossed the 8000 level following brisk buying by foreign and domestic funds in early trading. 9000, December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by local operators as well as retail investors. 10,000, February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points during mid-session. The Sensex finally closed above the 10,000-mark on February 7, 2006. 11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched a peak of 11,001 points during mid-session at the Bombay Stock Exchange for the first time. However, it was on March 27, 2006 that the Sensex first closed at over 11,000 points as robust foreign fund inflows and a move by government towards greater capital account convertibility. 12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched a peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first time in the wake of massive buying from mutual funds around Rs. 3400 cr. in just 19 trading sessions, favourable credit policy. 13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 for the first time. It touched a peak of 13,039.36 and finally closed at 13,024.26. Sensex drivers were fund infusion from market players, falling oil prices, strong second quarter results from technology and banking companies, robust growth in infrastructure sector. 14,000, December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000 in the wake of strong FII inflow and healthy corporate earnings. 15,000, July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000 mark. 16,000, September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000 mark. 17,000, September 26, 2007 - The Sensex on September 26, 2007 crossed the 17,000 mark for the first time. 18,000, October 9, 2007 - The Sensex on October 09, 2007 crossed the 18,000 mark for the first time.
25

• •

THE BEHAVIOUR OF INDIAN STOCK MARKET

19,000, October 15, 2007 - The Sensex on October 15, 2007 crossed the 19,000 mark for the first time. 20,000, October 29, 2007 - The Sensex on October 29, 2007 crossed the 20,000 mark for the first time. The main drivers were strong FII buying coupled with short covering led to sharp up move. Registration of FIIs and Participatory Note issue clarification has put momemtum into sensex. 21,000, Jan 08, 2008 - The Sensex on January 08, 2008 touched all time peaks of 21078 before closing at 20873 due to expectation of excellent quaterly result and strong forward momemtum.

Graphical Presentation:

May 2009 On May 18, 2009, the sensex surged 2110.79 points from the previous closing of 12174.42 this leading to the suspension of trade for the whole day. This event created history in Dalal Street, by being the first ever time that trade had been suspended for an increase in value. This rally is primarily due to the victory of the UPA in the 15th General elections.

Sensex falls:
The top 18 single-day falls of the Sensex have occurred on the following dates:  January 21, 2008 ---------1,408.35 points  Oct 24, 2008---------------1070.63 points  March 17, 2008 --- -------951.03 points  January 22, 2008 ---------857 points  February 11, 2008 --------833.98 points
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THE BEHAVIOUR OF INDIAN STOCK MARKET

 May 18, 2006 --------------826 points  October 10,2008 --------- 800.10 points  March 13, 2008 --- -------770.63 points

    
  

 

December 17, 2007 ----- 769.48 points January 7,2009 ------------749.05 points March 31, 2007 ---------- 726.85 points October 06, 2008 ---------724.62 points October 17, 2007 ---------717.43 points September 15, 2008 ------710.00 points January 18, 2007 ----------687.82 points November 21, 2007 ------678.18 points August 16, 2007 ----------642.70 points June 27, 2008 -------------600.00 points

Major crashes since 2000:
May 2006 On May 22, 2006, the Sensex plunged by 1100 points during intra-day trading, leading to the suspension of trading for the first time since May 17, 2004. The volatility of the Sensex had caused investors to lose Rs 6 lakh crore ($131 billion) within seven trading sessions. The Finance Minister of India, P. Chidambaram, made an unscheduled press statement when trading was suspended to assure investors that nothing was wrong with the fundamentals of the economy, and advised retail investors to stay invested. When trading resumed after the reassurances of the Reserve Bank of India and the Securities and Exchange Board of India (SEBI), the Sensex managed to move up 700 points, still 450 points in the red. The Sensex eventually recovered from the volatility, and on October 16, 2006, the Sensex closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76. This was a result of increased confidence in the economy and reports that India's manufacturing sector grew by 11.1% in August 2006. Effects of the subprime crisis in the U.S. : On July 23, 2007, the Sensex touched a new high of 15,733 points. On July 27, 2007 the Sensex witnessed a huge correction because of selling by Foreign Institutional Investors and global cues to come back to 15,160 points by noon. Following global cues and heavy selling in the international markets, the BSE Sensex fell by 615 points in a single day on August 1, 2007. January 2008 In the third week of January 2008, the Sensex experienced huge falls along with other markets around the world. On January 21, 2008, the Sensex saw it’s highest ever loss of 1,408 points at the end of the session. The Sensex recovered to close at 17,605.40 after it tumbled to the day's low of 16,963.96, on high volatility as investors panicked following weak global cues amid fears of a recession in the US.
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THE BEHAVIOUR OF INDIAN STOCK MARKET

The next day, the BSE Sensex index went into a free fall. The index hit the lower circuit breaker in barely a minute after the markets opened at 10 AM. Trading was suspended for an hour. On reopening at 10.55 AM IST, the market saw its biggest intra-day fall when it hit a low of 15,332, down 2,273 points. However, after reassurance from the Finance Minister of India, the market bounced back to close at 16,730 with a loss of 875 points.

Gigantic drops of the SENSEX in a day Of the six major falls of sensex in a day, three can be attributed to political developments and rests to scams. Political stability and scams have, to a large extent, influenced the market investor sentiment ---- domestic and international. Date 28 April 1992 12th May 1992
th

Fall (points) 570 333 327 303 246 894.31 869

Culprits Harshad Mehta involved in scam. Full effect of the scam. National Housing Bank involved in a scam. Congress withdraws support to Deve Gowda’s government Vajpayee’s government falls. Defeat of the BJP-led NDA government. 2009-10 Union Budget.

9th May 1992 31st March 1997 17th April 1999 17th May 2004 6th July, 2009

5.7 Major Indian Stock Market Reforms:
Securities and Exchange Board of India (SEBI): On 31st March 1992, the SEBI was established as an autonomous and statutory body. The SEBI is the regulatory authority to oversee the new issues, protect the interests of investors, promote the development of the capital market and regulate the working of stock exchanges. It has initiated a number of measures in these directions such as registration of intermediaries, strict disclosure norms, regulations on insider trading and inspection of the functioning of the stock exchanges and mutual funds, etc. Over-the-Counter Exchange of India (OTCEI):

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Over the Counter Exchange of India has been promoted jointly by ICICI, UTI, IDBI, IFCI, GIC, LIC, SBI, Capital Markets, and Canbank Financial Servics. It has been registered as a stock exchange with the SEBI and has commenced its operations from 6th October 1992. Its main aim is to provide small and medium companies an access to capital market in order to raise capital in a cost-effective manner. It is a regulatory body which supervises monitors and controls the trading activity at OTC (over the counter). The OTCEI operates at Mumbai with regional windows at other metrpolitan cities and representative offices in a few major cities.

5.8

National Stock Exchange (NSE):

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in 1992 as a tax-paying company unlike other stock exchanges in the country by Industrial Development Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banks and others. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. The NSE was incorporated with the following objectives: To establish a nationwide trading facility for equities, debt intruments and hybrids.  To ensure all investor all over the country equal access through an appropiate communication network.  To provide a fair, efficient, and transparent securities market to investors through an electronic trading system.  To enable shorter settlement cycles and book entry settlement system.  To meet the current international standards of securities markets. The exchange is professionally managed in that the ownership and managemet of the NSE are completely separated from the rightto trade on the exchange. In order to upgrade the professional standards of the market intermediaries, the exchange lays stress on factors such as capital adequacy, corporate structure, track record, and educational experience. Trading at NSE can be classified under two broad categories:  Wholesale debt market and  Capital market. Wholesale debt market operations are similar to money market operations - institutions and corporate bodies enter into high value transactions in financial instruments such as government securities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.
29

THE BEHAVIOUR OF INDIAN STOCK MARKET

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

 November 1992  April 1993  May 1993  June 1994  November 1994

• • • • •

Incorporation. Recognition as a stock exchange. Formulation of business plan. Wholesale Debt Market segment goes live. Capital Market (Equities) segment goes live.

 April 1995  June 1995
30

• •

Establishment of NSCCL, the first Clearing Corporation. Introduction of centralised insurance cover for all trading

THE BEHAVIOUR OF INDIAN STOCK MARKET

members.  July 1995  October 1995  April 1996  April 1996  June 1996  November 1996  November 1996  December 1996  December 1996  December 1996  February 1997  November 1997  May 1998  May 1998  July 1998  August 1998  February 1999
• • • • • • • • • • • • • • • • •

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

 October 1999  January 2000  February 2000  June 2000  September 2000  November 2000  December 2000
31

• • • • •

Setting up of NSE.IT. Launch of NSE Research Initiative. Commencement of Internet Trading. Commencement of Derivatives Trading (Index Futures). Launch of 'Zero Coupon Yield Curve'. Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd. Commencement of WAP trading.


THE BEHAVIOUR OF INDIAN STOCK MARKET

 June 2001  July 2001  November 2001  December 2001  January 2002  May 2002  October 2002  January 2003  June 2003  August 2003  June 2004  August 2004  March 2005  June 2005  December 2006  January 2007  March 2007  June 2007  October 2007  January 2008  March 2008  April 2008

• • • • • • • • • • • • • • • • • • • • • •

Commencement of trading in Index Options. Commencement of trading in Options on Individual Securities. Commencement of trading in Futures on Individual Securities. Launch of NSE VaR for Government Securities. Launch of Exchange Traded Funds (ETFs). NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category. Launch of NSE Government Securities Index. Commencement of trading in Retail Debt Market . Launch of Interest Rate Futures. Launch of Futures & options in CNXIT Index . Launch of STP Interoperability. Launch of NSE’s electronic interface for listed companies. ‘India Innovation Award’ by EMPI Business School, New Delhi. Launch of Futures & options in BANK Nifty Index. 'Derivative Exchange of the Year', by Asia Risk magazine. Launch of NSE – CNBC TV 18 media centre. NSE, CRISIL announce launch of IndiaBondWatch.com NSE launches derivatives on Nifty Junior & CNX 100. NSE launches derivatives on Nifty Midcap 50. Introduction of Mini Nifty derivative contracts on 1st January 2008. Introduction of long term option contracts on S&P CNX Nifty Index. Launch of India VIX.

 August 2008

Launch of Currency Derivatives.

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Index-based Market-wide Circuit Breakers: An index based market-wide circuit breaker system applies at three stages of the index movement either way at 10%, 15% and 20%. These circuit breakers bring about a coordinated trading halt in trading on all equity and equity derivatives markets across the country. The breakers are triggered by movements in either Nifty 50 or Sensex, whichever is breached earlier.
 In case of a 10% movement in either of these indices, there would be a one-hour market

halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no trading halt at the 10% level and market would continue trading.  In case of a 15% movement of either index, there should be a two-hour halt if the movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00 p.m. but before 2:00 p.m., there should be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the trading should halt for remainder of the day.  In case of a 20% movement of the index, trading should be halted for the remainder of the day.

5.9

FOREIGN INSTITUTIONAL INVESTMENTS AND THE INDIAN STOCK MARKET:

An important feature of the 1990s was the participation of FIIs in the stock market.FIIs was allowed to participate in the Indian stock Market in September 1992. They have become active investors since August 1993. As of 31st July, 2009, there are 1,679 FIIs registered with SEBI. FIIs Flows: From the graph, we can see the substantial increase in FIIs investment during the years between 2000 and 2006. FII investment in India has come in waves. The first wave of FII came in 1993-94 when the stock markets were opened up for foreign investors. FII net flow touched Rs. 6,791 crore in 2000. Then a large number of FIIs arrived with ‘emerging market’ funds in 2000-01 wherein the FII net investment touched a high of Rs. 13,084 crore. However, the FII fund flow declined tremendously in the year 2002. It came down to Rs. 3,555 crore. The major reasons for the decline in their
33

THE BEHAVIOUR OF INDIAN STOCK MARKET

investment were the dismal performance of the Indian stock market and the slow pace of reforms.The third wave which came in 2003 brought in new FIIs such as Hedge funds, university funds and development market funds to encash India’s growth story. The net FII inflow touched a record Rs. 30,893 crore in 2003 and Rs. 37,183 crore in 2004 with most of the investment in promising mid-cap stocks. Since 2004, a rally in mid-cap shares raised the market capitalisation ratio thereby benefitting FIIs and increasing their interest in Indian stock. This increased investment was on the account of strong macro-economic fundamentals, abolition of long-term capital gains tax, etc. Most FIIs took advantage of depressed prices increased their stakes in frontline Sensex stocks such as Infosys, HLL, Reliance, ITC, etc. FIIs increase their activity whenever there is downturn in the stock market. They identified and picked up the old economy Indian companies which were being traded at a discount and actively bought those shares. Sectoral Holding of FIIs:

Structural Reforms and Impact of FIIs on the Capital Market: India has been in the forefront of utilizing technology to enhance its stock market performance. Both the stock exchanges’ (BSE and NSE) web sites provide a real-time update of various indices, streaming quotes of stocks, the news updates, screen-based order matching system. Further reforms on practices like rolling settlements, trade guarantee, demat settlement and derivative trading have certainly added depth (volume of a particular stock) and breadth (number of stocks traded) to the market. Change in the Pattern of Equity Holding of Sensex Listed Companies: Equity Holding Pattern of Sensex Companies Promoters Share
34

Institutional Investor Share

Mutual Fund & UTI share

Banks, FIs, Insurance cos share

(In percentage) % FIIs Others share

THE BEHAVIOUR OF INDIAN STOCK MARKET

March -05 March – 06 March – 07 March – 08

32.42 31.66 34.49 38.28

35.81 35.84 36.54 35.88

6.67 5.38 4.46 3.46

11.62 13.91 10.27 9.67

17.52 16.55 21.63 22.75

31.77 32.50 28.97 25.84

Source: CMIE Prowees Database The growing significance of FIIs in the stock market can be observed from the share of FIIs in the equity holding of the Sensex companies, which has increased from 17.52% in March 2005 to 22.75% in March 2008. On the other hand, the domestic institutions have continuously divested their share over the same period. Despite the increase in the share of FIIs the combined share of the domestic institutions exceeds that of FIIs holding. Hence the FIIs alone cannot be squarely blamed for the destabilizing developments in the Sensex. The magnitude and the duration of FIIs involvement in the stock market has definitely created opportunities and scope for the domestic players to grow to strength in terms of depth and breadth. The total proportion of households investing in equities or in mutual funds has been around 9%. Indian institutions of long-term finance like provident and pension funds do not invest in equities. This is on account of the prevailing legislation as well as the opposition of workmen to equity investments. While insurance companies do invest a portion of their funds in equities, the penetration of insurance in India is at a very low level, limiting the availability of funds for equity investments. Thus, a lot of domestic capital is flowing into unproductive uses like gold and in financing the fiscal deficit of the government.

6. Market Trend:
Almost every day in the investing world, we used to hear the terms "bull" and "bear" to describe market conditions. As common as these terms are, however, defining and understanding what they mean is not so easy. Because the direction of the market is a major force affecting one’s portfolio, it's important to know exactly what the terms bull and bear market actually signify, how they are characterized and how each affects. Bull and Bear- these two terms are constantly buzzing around the investing world. At the same time, because the market is determined by investors' attitudes, these terms also denote how investors feel about the market and the ensuing trend. Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained increase in market share prices. In such times, investors have faith that the uptrend will continue in the long term. Typically, the country's economy is strong and employment levels are high. On the other hand, a bear market is one that is in decline. Share prices are continuously
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THE BEHAVIOUR OF INDIAN STOCK MARKET

dropping, resulting in a downward trend that investors believe will continue in the long run, which, in turn, perpetuates the spiral. During a bear market, the economy will typically slow down and unemployment will rise as companies begin lying off workers. Where Did the Terms Come from? The origins of the terms "bull" and "bear" are unclear, but here are two of the most common explanations: 1. The bear and bull markets are named after the way in which each animal attacks its victims. It is characteristic of the bull to drive its horns up into the air, while a bear, on the other hand, like the market that bears its name, will swipe its paws downward upon its unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents when it was popular to put bulls and bears into the arena for a fight match. Matches using bulls and bears (whether together or gains other animals) took place in the Elizabethan era in London and were also a popular spectator sport in ancient Rome. 2. Historically, the middlemen who were involved in the sale of bearskins would sell skins that they had not yet received and, as such, these middlemen were the first short sellers. After promising their customers to deliver the paid-for bearskins, these middlemen would hope that the near-future purchase price of the skins from the trappers would decrease from the current market price. If the decrease occurred, the middlemen would make a personal profit from the spread between the price for which they had sold the skins and the price at which they later bought the skins from the trappers. These middlemen became known as bears, short for "bearskin jobbers", and the term stuck for describing a person who expects or hopes for a decrease in the market. Characteristics of a Bull and Bear Market: Although we know that a bull or bear market condition is marked by the direction of stock prices, there are some accompanying characteristics of the bull and bear markets that investors should be aware of. These can be mentioned as below:
 Supply and Demand for Securities- In a bull market, we see strong demand and weak

supply for securities. In other words, many investors are wishing to buy securities while few are willing to sell. As a result, share prices will rise as investors compete to obtain available equity. In a bear market, the opposite is true as more people are looking to sell than buy. The demand is significantly lower than supply and, as a result, share prices drop.

Investor Psychology - Because the market's behavior is impacted and determined by how individuals perceive that behavior, investor psychology and sentiment are fundamental to whether the market will rise or fall. Stock market performance and investor psychology are mutually dependent. In a bull market, most everyone is interested in the market, willingly participating in the hope of obtaining a profit. During a bear market, on the other hand, market sentiment is negative as investors are beginning to move their money out of equities and into fixed-income securities until there is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, in turn, causes the decline in the stock market.

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Change in Economic Activity - Because the businesses whose stocks are trading on the exchanges are the participants of the greater economy, the stock market and the economy are strongly connected. A bear market is associated with a weak economy as most businesses are unable to record huge profits because consumers are not spending nearly enough. This decline in profits, of course, directly affects the way the market values stocks. In a bull market, the reverse occurs as people have more money to spend and are willing to spend it, which, in turn, drives and strengthens the economy.

6.1

BULL MARKET:

Definition: A prolonged period in which investment prices rise faster than their historical average. A bull market refers to when the prices of stocks have gone up steadily over an extended time period. A bull market means a market that is going up instead of down. Normally during a bull market, the economy of the country is stable and strong, and unemployment is low. The assumption by the investors is usually that the market will continue the upward swing. The opposite of a bull market is a bear market. A bull market can be described by some characteristics that occur, and investors should watch these characteristics closely to determine what trades to make. It is a financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities. A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains. In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also sometimes described as a bull run. Bull markets can happen as a result of an economic recovery, an economic boom, or investor psychology. The longest and most famous bull market is the one that began in the early 1990s in which the U.S. equity markets grew at their fastest pace ever. In simple, bull-market refers to a financial market of a group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities. Bull markets are characterized by optimism, investor’s confidence and expectations that strong results will continue. Why is it called a Bull Market?
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THE BEHAVIOUR OF INDIAN STOCK MARKET

The term "bull" is used to describe the market, because bulls attack by pushing their horns out and up. Hence the thrusting motion up resembles the upward move of the markets. Also, when bulls run together, they do so without looking back and go full steam ahead. This is also the mentality of the markets as traders and speculators trip over themselves attempting to jump on the band wagon for quick gains.

Features of Bull market:
A bull market is not simply stocks that are on the rise in price. There are some other factors that can affect the type of market and how trades are being done as well, and this is also true in a bear market or any other market type.
 One of these factors is the level of supply and demand for securities for trading. A

bull market will exhibit signs of a strong demand for securities against a weak supply for them. Many traders and investors want to purchase securities, but most traders and investors do not want to sell, and this will cause the market price to go up in response. Because investors want securities but they are in short supply, the investors are willing to pay a higher price for them, and this is what causes the stock price to rise. Another factor concerning a bull market is the psychology involved. The psychology of the investors is an important factor, because the behavior of the market is based in part on the behavior and mindset of the investors. The performance of the stock market and the psychology of the investors are dependent on each other, and the thoughts and fears of investors will determine whether the market goes up or down. This is a fundamental principle, and the psychology of investors will determine how the market reacts. During a bull market investors want to buy, because the price is going up, and investors are confident that buying stock can be profitable if this trend continues. A bull market means plenty of investors trying to buy and share in the wealth in the hopes that the market prices continue to rise. Investors will pull money out of fixed income securities that pay less, and invest in the stock market instead. Another factor that plays a part in a bull market, or any market fluctuations and trading activities, is the economic activity. There is a very strong link between the economy and the stock market. Businesses are the base for the stocks that are traded on the market, and the economy has a huge effect on these businesses. In a bull market, the economy is strong and stable, and economic growth and activity are high. Consumer spending is high, because people have extra money, and this strengthens the economy and raises the market price of the stocks. This is because businesses are making profits and can afford to expand, leading to even more potential profits. A bull market can be risky, however, because eventually what goes up must come down, and the volume of trading in a bull market is high. This can have an effect known as the bubble effect, because stocks rise so high they become overvalued, and eventually the bubble will burst and the market can collapse swiftly.

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Apart from the above noted points, there are another five major characterstics of Bull Market.  Economic Growth: Clearly the economy matters a whole lot to the stock market. If we are in a period of consistent economic growth there is good chance we will either be in a Bull market, or one will be starting shortly. The whole basis of how a stock is valued is based on how well a company doing economically, so while some companies may do better than others in a strong economy the market as a whole should be very strong.  Less Volatility: Volatility tends to be a friend of a bear market and lack of volatility tends to lead to higher prices. If we step back and watch the market we’ll notice that in a down market the daily swings tend to be much larger than in an up market. In a Bull market, things are more stable and under control and the gains are generally small and steady.  Reasonably Amount of certainty: Uncertainity is one of the biggest allies of Bear market and one of the biggest enemies of Bull Market. As long as market participant can feel pretty comfortable that estimates at blue chip companies are accurate and economists forecasts are pretty much in line then the market typically behaves well.  Strong Market Breadth: During a bull market there is strength throughout many market sectors. Typically the volume to the upside will be much stronger than that to the downwards. In a bear market rally the move is typically from a smaller number of stocks and breadth isn’t so strong.  Strong corporate Balance sheets: It is very important to have a large amount of companies with strong corporate balance sheets. Strong Balance sheets also reward investors with a nice dividend, which is always a good perk.

Existence Period of Bull market:
No bull market can continue to exist for a very long period, as the prices can’t raise infinitly. After a certain point prices has to go down. The Bull markets lasts generally for a few months and in these months high volume of trading takes place in bull markets. In the Bull market, Bull is the investor who expects price level to rise and buys a type of security or commodity in hope of earning high profit by reselling it in the future when the price rise will takes place.

Factor responsible for Bull Market:
There has been a sharp rise in the index in the last year as the sensex moved from a level of 15000 to 20000 in just four months. Again SENSEX, was in a bull run for almost five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable and recent bull market was in the 1990s when the U.S. and many other global financial markets rose rapidly. The following were the main reasons for this sudden rise of sensex. Higher GDP Growth: The Indian economy is rising in full swing. The Gross Domestic Product (GDP) growth for last two years was over 8% and 9% respectively. It was expected to rise at the rate of 8.5% over next couple of years. Corporate revenues had notched a 30-plus %
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THE BEHAVIOUR OF INDIAN STOCK MARKET

rise in revenues for nearly last five years. The domestic retail demand continued to be robust. All these led to firm belief of investors in the Indian growth story. Continuous Fund flows: Foreign funds have bought a net 16.2 billlion dollars into the bourses till October 10, 2007. This is on the back of investment of over $10 billion for 2005 and over $14 billion for 2007. Over the last few years, Foreign Institutional Investors (FIIs) have been investing into India very heavily. Apart from FIIs, even the Non-Residents Indians (NRIs) have been investing highly into the Indian Equity markets. According to the RBI data, annual inflow of NRI deposits into the country for the year 2006-07 stood at $3.9billion against $2.8 billion in the year 2005-06. About 46% of this money was invested into the shares. According to the recently published Merril Lynch-Capegemini Asia-Pacific Wealth Report, NRI segment is emerging as a niche segment in the HNI category. By Dec. 31, 2007 net equity investments of NRIs were to the tune of Rs. 27500 crores. Strong Book orders: The order books of Indian companies especially the infrastructure and related industries have been very strong. The companies like Larsen & Turbo, Punj Loyd, Simplex Infra, Patel Engineering, etc, have the orders worth up to four times their current annual sales. This has led to higher confidence of investors into these industries. Commitment to reform: Despite the pressures from its Left allies, the UPA Government at the centre has shown its commitment towards reforms. Steps taken to stick to fiscal targets, opening up of the retails sector and aviation sectors to foreign investment, etc. have boosted the confidence of foreign investors in the Indian economy. The government has also stepped up its efforts in the direction of divestment and privatisation. Bulky Forex Reserves: The Forex reserve of India is ballooning. It has already crossed the mark of $250 billion and is heading towards achieving the feat of $300 billion. This promoted the International Credit Rating agencies to upgrade India’s credit rating in foreign currency. Stable Government: The determinant of growth for an economy is to have an efficient and stable government that really works. There should be continuity in political sphere because if public policies go on changing more frequently, economic progress cannot continue, rather private and public investment will be discouraged. So, the existence of UPA government for second consecutive time is creating favourable condition for the Indian Stock market. Other factors: Apart from the above-noted factors, there are some important factors. These may include high GDP growth rate, Good crops, Good rainfall, Better demand, Stability in International market, higher cash flow, etc.

Bull Market Strategy:
In a bull market, the ideal thing for an investor to do is take advantage of rising prices by buying early in the trend and then selling them when they have reached their peak. (Of course,
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THE BEHAVIOUR OF INDIAN STOCK MARKET

determining exactly when the bottom and the peak will occur is impossible.) On the whole, when investors have a tendency to believe that the market will rise (thus being bullish), they are more likely to make profits in a bull market. As prices are on the rise, any losses should be minor and temporary. During the bull market, an investor can actively and confidently invest in more equity with a higher probability of making a return. So, to gain highest level of profits an investor in the bull market should buy early in the upward trend of prices and should sell when the price level reaches the peak. But, it is really tough to guess the peak of price level, after which the prices will fall. Though, it is more likely for the investors to earn more profits rather than suffering from loss in a Bull market as are on the rise. Even if there are losses they are oviously negligible and temporary. In a Bull Market, more volume of investment raises the chances of good returns. And, a good understnding of longterm market trend can take the level of returns to a new high. There is no sure way to predict market trends, so investors should invest their money based on the quality of the investments. At the same time, however, one should have an understanding of long-term market trends from a historical perspective. Because, both bear and bull markets will have a large influence over investments. So, one should take time to determine what the market is doing when making an investment decision. However, in the long term, the market has posted a positive return.

6.2

BEAR MARKET:

Bear market refers to a prolonged period in which investment prices fall, accompanied by widespread pessimism. If the period of falling stock prices is short and immediately follows a period of rising stock prices, it is instead called a correction. Bear markets usually occur when the economy is in a recession and unemployment is high, or when inflation is rising quickly. The most famous bear market in U.S. history was the Great Depression of the 1930s. The term Bear Market refers to a declining or poor state of the market or trading group, usually a stock market, in which consumer confidence and financial expectations are on a decline and the market continues to lose value, usually at an average loss of 15% to 20% in one or more index over a 12 month period. Bear Markets get their name from the fighting techniques of bears. When in danger, bears will stand on the hind legs and swipe down with their front paws. This downward movement is used as a metaphor for the market trends. In addition, like the fast pace of the bear's swing, bear markets traditionally define periods of time in which there is a substantial decline in stock values. Unlike Corrections that occur over short periods of time, however, bear markets are longer-lived with a greater loss. Investors usually sell large quantities of shares during bear markets, contributing to the rising pessimism and fear that accompanies large downturns in the stock indexes. These types of scenarios usually perpetuate the decreasing value of stocks, causing more fear and even more sales. Historically, bear markets have been the cause of major economic problems such as the 1929 Wall Street Crash and the energy crisisin the 1970s.
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THE BEHAVIOUR OF INDIAN STOCK MARKET

Some Bear Market Investing Strategies: It goes without saying that the skills required to make money in the stock market are very different depending upon whether the market is rising or falling. These strategies include: Flight to safety. If markets are choppy and volatile and the general trend is downwards, why be in the market? Why not, instead, sell a worthwhile percentage of holdings and move the money into either cash or bonds (medium and long term government or corporate debt). As and when the market seems to have settled, and hopefully, there is some value to be found, assets can be repurchased.  Buy defensive assets. In every phase of the business cycle, there are some assets which rise in price whilst others are falling. This is also the case in the stock market. Some sectors will rise whilst the market generally is falling. It is therefore possible to stay in the market and make returns.  Buy units in a 'bear fund'. Some mutual funds are designed with downward market movements in mind. These funds often show very poor returns as the stock market rises. In long bull runs, ownership of these funds can be justified as portfolio diversification, but is more likely to be very costly!  Trade in the market. An agressive bear market investing strategy is to actively profit from the price falls. Historically, this is known as "short selling" or "going short". The process essentially involves the trader selling shares which they do not actually own. The hope is that when settlement day comes, the shares can be bought back in the market at a lower price and the trader will make a profit from the difference in prices. In a bear market, however, the chance of losses is greater because prices are continually losing value and the end is not often in sight. Even if you do decide to invest with the hope of an upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the profitability will be found in short selling or safer investments such as fixed-income securities. An investor may also turn to defensive stocks, whose performances are only minimally affected by changing trends in the market and are therefore stable in both economic gloom and boom. These are industries such as utilities, which are often owned by the government and are necessities that people buy regardless of the economic condition.

Factors Responsible For Bear Market:
The bear market is the interval in the capital market characterized by falling prices for securities. It is a period when most of the prognosis of stockbrokers and experts are thrown into winds and are torn into shreds. We should remember that there will always be a bull and bear market as long as the forces of demand and supply continue in the capital market. Some major factors responsible for Bear market are explained below:
 Massive profit taking:

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Profit taking is the name of the game; stock traders generally look forward to selling off their stocks once their objective for buying into a stock is achieved, but when this action is carried out en masse it can trigger off a bearish session. During the bull market stock traders take advantage to sell of their stocks, the massive shedding will eventually have its toll, so watch out when you observe there is massive effort by stock traders to sell their stocks, know the bear market will come knocking.

 Active and prolong primarymarket activities:

The primary market is the other half of the secondary market, both markets function in diverse ways. The primary market is where the vast majority of investors do business, the reason is not farfetched; it is an all comers market. For this reason whenever there is prolong activities in the primary market, in other word, if there are so many initial public offerings and private offerings, investors will channel their funds to the primary, sometimes they may even withdraw their funds, the effect there will be more sellers in the secondary in the secondary market than buyers, supply will outperform demand thereby driving down the prices of shares.

 Massive panic selling by emotion driven

investors:

One of the feature of a bearish a bearish market, is the reaction of emotion and sentiment driven investors. The bearish season over the years from my experience analyzing and trading stocks have always beaten uninformed investors who have not imbibe the entry and exit strategy that I know has most of the time protected wise and seasoned stock traders. When the vast majority observes that the prices of stocks are rallying down they react by selling off their which affects the stability of the secondary market.

 Subprime Crisis:

It all started with the subprime crisis in the U.S. When the housing market was booming in the U.S, banks sold housing loans to those who were undeserving, generally known as subprime borrowers, at higher interest rates. When the housing markets declined in the U.S., the defaults from such borrowers started increasing and the lending institutions were facing huge losses. This loss is estimated to over $100 billion. A couple of companies have also filed for bankruptcy due to heavy losses. Through, it does not have any direct impact on the Indian market, it affected indirectly. As many of these lenders
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THE BEHAVIOUR OF INDIAN STOCK MARKET

have also invested in the Indian markets, they started selling their shares in order to maintain liquidity and keep their companies running.

 Higher Sustained Oil prices:

The crudeprices are on the upward movement for last two years. After touching a high of $90 per barrel, the prices are hovering around $70. This sustained high price of crude has been affecting the economy as India is heavily dependent on import of crude oil. The pressure on the crude refining companies is mounting and they are bleeding on losses.

7. Volatility:
Volatility of a stock measures the frequency with which changes in its market price take place over a period of time. Again, volatility in the market is a function of information, misinformation and sometimes lack of information. In other words, Stock market volatility indicates the degree of price variation between the share prices during a particular period. A certain degree of market volatility is unavoidable, even desirable, as the stock price fluctuation indicates changing values across economic activities and it facilitates better resource allocation. But frequent and wide stock market variations cause uncertainty about the value of an asset and affect the confidence of the investor. The risk averse and the risk neutral investors may withdraw from a market at sharp price movements. Extreme volatility disrupts the smooth functioning of the stock market. Inter–day Volatility: The variation in share price return between the two trading days is called inter–day volatility. Standard deviation is used to calculate inter–day volatility. Intra–day Volatility: The variation in share price return within the trading day is called intra– day volatility. It indicates how the indices and shares behave in a particular day.

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Return: Return is the motivating factor that induces the investors to invest money in shares. Return means the profit earned as a result of rise in share prices. Return helps the investor to compare the benefits available in the alternative investment avenue.

Volatility in Share prices:

Year wise descriptive statistics for Nifty and Sensex: TABLE 1
Year 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 45 Name of the indices Nifty Sensex Nifty Sensex Nifty Sensex Nifty Sensex Nifty Sensex Nifty Sensex Nifty Minimum index level 808.7 2764.16 931 3245.27 1124.7 3540.65 854.2 2600.12 922.7 2834.41 924.3 2924.03 1388.75 Maximum index level 1212.75 4280.96 1756 5933.56 1624.65 5541.54 1198.45 3742.07 1146.5 3512.55 1982.15 6194.11 2168.95 Daily average return 0.0029% 0.1163% 0.1561% 0.1411% -0.0944% -0.1379% 0.0032% -0.0113% -0.0524% -0.0557% 0.2444% 0.2383% 0.0681%

THE BEHAVIOUR OF INDIAN STOCK MARKET

2005-2006 2006-2007 2007-2008

Sensex Nifty Sensex Nifty Sensex Nifty Sensex

4505.16 1902.5 6134.86 2632.8 8929.44 3633.6 12455.37

6915.09 3418.95 11307.04 4224.25 14652.09 6287.85 20873.33

0.0492% 0.2075% 0.2158% 0.0466% 0.0500% 0.0853% 0.0919%

Analysis: The daily average return of the Nifty and the Sensex in the year 1998–99 was 0.00294 per cent and -0.02482 per cent respectively. The Nifty had positive return whereas the Sensex had negative return. The pressure of economic sanctions following detonation of nuclear service, woes of East Asian financial markets, volatility of Indian currency and the redemption pressures faced by the Unit Trust of India (UTI) in respect of its US–64 Scheme made the Nifty decline from 1212.75 in April, 1998 to 808.7 in October, 1998 and the Senses from 4280.96 to 2764.16. In the year 1999–2000, the Nifty and the Sensex return increased from 0.00294 percent to 0.15606 per cent and -0.02482 per cent to 0.14112 percent respectively. The union budget of 1999, strength of the Government and also its commitment towards second generation reforms improved macro economic parameters and better corporate results raised the return. In this year the growth rate of GDP and industrial sector was 6.4 per cent and 6.6 per cent respectively and within industrial sector, the growth rate of manufacturing sector was 7.3 per cent. The trend got reversed during 2000–2001.The Indian economy decelerated and the Nifty and the Sensex yielded negative return of –0.09435 per cent and -0.13788 per cent respectively. There was a large sell off in new economy stocks in global markets. This brought down the Nifty from the height of 1636.95 in April, 2000 to the lower level of 1108.20 in October, 2000 and the Sensex from 5426.82 in April, 2000 to 3689.43 in October, 2000. The growth rate of GDP and the industrial sector declined from 6.4 per cent to 6 per cent and from 6.6 per cent to 4.9 per cent respectively. Within the industrial sector, the growth rate of manufacturing sector declined to 5.2 per cent and the infrastructure sector also registered a lower growth as compared to that of the previous year. Scams have over and again proved the vulnerability of the regulatory network and system of the finance and capital markets in this year. Ketan Parek scam in the stock market resulted in a big default in Calcutta Stock Exchange, the BSE and the NSE. Several stockbrokers grossly misused the badla finance given to them by investors. FIIs investment was very low in that year. The above cited reasons were the major reasons for the negative returns. The year 2001–02 recorded positive return of 0.00317 per cent but Sensex had negative return of -0.01129 per cent. The introduction of rolling settlement and derivatives encouraged FIIs and domestic investment even though markets were affected by riots in Gujarat, cyclone in Orisa, suspension of repurchase facility under UTI’s US 64 scheme and the attack of World trade Center, Indian Parliament and Jammu and Kashmir Assembly.
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THE BEHAVIOUR OF INDIAN STOCK MARKET

The daily average return in the Nifty and the Sensex was the highest in the year 2003–04. Strong economic fundamentals exhibited in the fall in interest rates, strong GDP growth rate, increase in foreignexchange reserves and exports of Indian companies doubled the Nifty and the Sensex in the first three quarters. Further, the large expenditure by the Government on infrastructure sector and the reform process enhanced the morale and motivation levels of Corporate India which in turn boosted the stock market returns. There was a decline in the return in the year 2004–2005. As the index value of the Nifty sharply came down from 1892.45 and 5925.58 respectively on 23rd April 2004, to 1388.75 and 4505.16 respectively in May, 2004, a lower circuit breaker was applied on the NSE for the first time. This brought a total halt to all trading and the fund flow to stock market from the retail investors and the Foreign Institutional Investors dwindled. Slow down in Chinese economy, tax exemption on long term capital gain, and tax reduction on short term gain, the appreciation of rupee against the US dollar, low returns of bank FD rate and insurance policies and negative returns of debt market mutual funds prevented the negative return. The over all performance of the stock markets in the world was well. By 2005, India’s growth story was well established. Money started pouring in from everywhere. A new industrial resurgence; a pick up in investment; modest inflation in spite of spiraling global crude prices; rapid growth in exports and imports with a widening of the current account deficit; laying of some institutional foundations for faster development of physical infrastructure; progress in fiscal consolidation; and the launching of the National Rural Employment Guarantee (NREG) Scheme for inclusive growth and social security increased the return in the year 2005-2006. All these factors boost the Indian stock market scaled high. Two things have happened in this period to push the market to uncharted territory. One is a robust inflow of foreign money, as more and more FIIs have rushed to pump money into the Indian market. What is new about these inflows is the decisive move made by Japanese funds to look at India as an alternative to China, the bulk of the $ 1.9 billion that has flowed into Indian markets in July alone has come from Japanese FIIs, taking the total FII investments in 2005 to around $7 billion. The number of new FIIs registered during the year has also gone up significantly. Again there was a decline in the market return in the year 2006-2007. Global crude oil prices were surging yet again and had touched $78 a barrel due to the tensions in West Asia and the hurricanes from the Atlantic into the US east coast of the year further surged in crude prices and oil production and refinery output were disrupted in the affected area. Global liquidity had almost been drained off following the rate increases in the US, Europe and in Japan. FII flows in 2006, at about $8.5 billion (around Rs 38,000 crore), were lower by 20 per cent than in 2005.

RETURNS IN BULL PHASE AND BEAR PHASE:
Ups and downs in the share prices are quite natural in stock market. The bull and the bear markets have certain characteristics and the investors adopt different strategies in the bull and the bear markets. The rise and the fall of shares are linked to a number of conditions such as political climate, economic cycle, economic growth, international trends, budget, general business conditions, company profits, product demand etc. In the bull market, buy–hold
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THE BEHAVIOUR OF INDIAN STOCK MARKET

approach is adopted and in the bear market sell–move out approach is adopted by the investors. Results of return during the bull and the bear phases are presented in the Appendix: Table 2.

Analysis:
The durations of the bull and the bear phases are more or less similar for the stocks of the Nifty and Sensex. In the bear phase–A, they had negative return of –0.22900 per cent and –0.25564 per cent respectively. Nuclear tests conducted in May, 1998 and imposition of economic sanctions by the US, Japan and other industrialized countries resulted in uncertainty in the Indian stock market. In the bear phase, the FIIs net investment was negative and they were net sellers except in July and September 1998. The growth in macro economic factors like GDP, industrial sector and manufacturing sector turned out to be positive with good corporate results. FIIs average monthly investment was Rs.52.41 crore in the bull phase. This moved the Nifty and Sensex to newer peaks. There was a hike in the Nifty and the Sensex index level from December, 1998 to February, 2000. The bear phase–B lasted for more than one and a half year due to economic and financial turmoil. FIIs average monthly investment during the phase was Rs 43.15 crore which was very low compared to the investment in the previous bull period. National and international events like fall in the growth of GDP, the earth quake in Gujart, Ketan Parek scam, UTI’s ban on repurchase facility under US 64 scheme , the proposal to increase the tax on distribution of dividend by companies and MFs from 10 per cent to 20 per cent set the bear phase in motion. Then the Nifty and the Sensex index oscillated back and forth from 869.05 to 1193.05 from September, 2001 to April, 2003 and 2600.12 to 3712.74 from September, 2001 to March 2003 respectively. The net inflows of FIIs declined from Rs.87552 mn in 2001–2002 to Rs.26889 mn in 2002 – 2003. FIIs were net sellers in the month of June and October, 2002. The Nifty and Sensex experienced a steady upward movement from April 2003 to January 2004. About 83 per cent of the NSE stocks were up in the bull phase. In the mid 2003, India was one of the preferred FIIs destinations in Asia compared to Korea and Taiwan. Liberalization in EXIM policy, monetary policy and mini–budget, rapid growth in the economy, superior return on equity (ROE) vis-à-vis other market in the region, low volatility in ROE, a strong financial system, a robust corporate performance and the strong risk adjusted return of the Indian market attracted many foreign investors to India. The busy bull market turned into bear market for a very short duration. All the indices saw continuous and substantial fall from January, 2004 to May, 2004. Many reasons can be cited for this fall. The ban on Participatory Notes made FIIs to sell and the banks that did margin funding against shares also started selling. Retail investors and HNIs transferred some portion of their holdings in equities to bullion market because the price of gold increased to Rs.6360 per 10 gm on 7th January, 2004 and the silver increased to Rs10, 610 a kg on 2nd March, 2004. On 14th May 2004 the value of the Nifty plunged deeply from 1582.4 to 1388.75 on 17th May 2004, and the circuit breaker was applied on the Nifty for the first time. The prospect of a nonBJP government in the center created a doubt about the reform process in the minds of investors and the brokers, and this affected the sentiment of the domestic investors.
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THE BEHAVIOUR OF INDIAN STOCK MARKET

After the election results, the market sentiment turned different for the better. On 6th July 2004, the railway budget was presented. The market responded to the railway budget positively. The rise in rupee value, the fastest growth in economy (8.2 per cent) and the manufacturing boom attracted huge FIIs inflows. FIIs holding in the Nifty stock in June, 2004 was Rs.1, 10, 000 crore and that FIIs registered with SEBI, increased from 492 in 1999 to 694 by April, 2005. Continuous GDP growth, sustained industrial growth and heavy FII’s inflows strengthen the stock market in its peak with its ups and downs.

8. Findings:
Factors responsible for Volatility:
Indian stocks are found to be highly volatile. Volatility is caused by a number of factors such as speculation, the trading and settlement system, the government, inflation, interest rates, announcement of corporate results, etc. All these factors directly or indirectly influence movement in share prices. Apart from these, the factors responsible for high volatility can be explained as follows:
 Inclusion of the new economy stocks, most of which were over-valued in the BSE



index. Increased influence of international stock indices, espicially the NASDAQ. High speculation when the badla system was prevelent led to large fluctuations in prices. Day trading increased which led to wild fluctuations in intra-day prices. Foreign Institutional Investors (FIIs), exit the markets at the slightest whiff of trouble. This increases volatility in the stock markets. Domestic investors follow FIIs and

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THE BEHAVIOUR OF INDIAN STOCK MARKET

emaluate their investment pattern. If, FIIs buy, everyone buys and if FIIs sell, everyone sells.  Indian markets have high volume but they lack depth as the volums are contributed by few institutional participants. Indian markets lack hedge funds and pension funds, whch can take a long-term view of the markets.  External factors such as world politics and disturbances, the IT revolution, the information boom by the business news channels, rising oil prices and apprehensions of rise in international rates contributed to high volatiliy.  The announcement in the Union Budget 2004-05 regarding imposition of the Securities Transaction Tax (STT) affected the market sentiments adversely. These factors, in turn, are responsible for the development of the stock market in our country and making it comparable with the global markets.

9. Recommendtions:
This kind of volatility and sudden crash of the market is not a good indicator of sound financial markets. It may affect the confidence of the retail as well as the foreign investors in the Indian markets. Therefore, the government needs to look into the situation and take some steps to strenghten the markets. The following measures are suggested to remove the structual deficiencies of the market and improve the market mechanism:  There is lack of depth in the market. The fear of FIIs pulling their money out of the market is always seen as a big threat. To avoid this, more institutional players such as pension funds are required to invest in the market and provide it the required depth.

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THE BEHAVIOUR OF INDIAN STOCK MARKET

 There is a need for a robust securities lending and short selling infrastructure. It will help the long term investors to earn on their investments and provide heterogenerity in the market.
 Securities and Exchange Board of India (SEBI) needs to keep a vigil on the sharp rise in

any stock without a reasonable cause. It needs to keep track of the investors in such companies and trace the source of investment to avoid any type malpractices.  There is inability of the banking system to turn around the funds quickly. When the Sensex was falling, the banking could not divert the funds to rescue the investors quickly which led to margin calls and sudden crash of the market.  To control insider trading and manipulation of prices, strict regulatory and punitive measures should be adopted by the SEBI and stock exchanges.  To stop operations in the unofficial and unregulated grey market, the publication of unofficial quotation in newspaers and magazines should be declared illegal and sale of shares before acquisition by buyers should be banned.
 To avoid confusion among the investors, there should be proper coordination among the

stock exchanges in India. There should not be any overlapping in their areas of operations.
 Investors should take into consideration various things before investing into scripts such

as:  Financial position of the company.  Liquidity position.  Past performance of company.  Brokers should not exceed their trading limit in terms of upper and lower limit.

10. Conclusion:

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THE BEHAVIOUR OF INDIAN STOCK MARKET

The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the investors. So, over- reactions and wrong speculation can give rise to irrational behavior of the Stock Market. Excessive optimistic speculation of future prospects can raise the prices of stocks to an extreme high and excessive pessimism on the part of the investors can result in extremely low prices. So, it is extremely difficult to make predictions about the Stock Market and the inexperienced investors who are not that much interested in financial analysis of stocks; rarely get the financial assistance from the Stock Market at the time of need. The factors influencing the stock market affect the volatility of the market in which they are traded. These factors, in turn, are responsible for the development of the stock market in any country and making it compareable with the global markets. So, stock market development is a multi-dimensional concept. Though many of the investors have lost life saving in the recent correction, there is life after the crash. The Indian growth story is intact with a forecast of over 9% growth for 2009-2010. The investment pipeline is estimated to be Rs.5, 00,000 crores. The government continues to spend heavilty on the infrastructure projects. Domestic demand is still robust. Nevertheless, the Indian stocks will continue to be attractive. Moreover, the fear of recession in the US will force the global investors to look for alternative investment destinations and India will be the biggest beneficiary. The only thing to be kept in mind is that greed always leads to devastations. The investors should not aim for very high returns as the level of returns is always positively correlated to the level of risk.

11. Limitations:
 A period of 60 days was a very short period to understand the stock market.
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THE BEHAVIOUR OF INDIAN STOCK MARKET

 The project is based on secondary data collected from other souces magazines, newspaper and websites etc.  Reliability of the sources could also be limitation for the project.  Possibility of error in analysis of data.
 The analysis is based on the past performance and does not confirm the future

performance.

12. References:

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Books:
 “Indian Financial System”, Second Edition ----- Bharati V. Pathak.  “Capital Markets in the BRIC Economies” ------ Rituparna Bhattacharya, Anuradha Sen

and Sandip Lahiri Anand.
 “Money, Banking & International Trade” ------- M.L. Jhingan.

Magazines:  Cometition Refresher. Websites:
 www.karvy.com  www.bseindia.com  www.nseindia.com  www.investopedia.com  www.sebi.com  www.google.com  www.wikipedia.com

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13. Annexure:
Table 1:

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THE BEHAVIOUR OF INDIAN STOCK MARKET

Descriptive Statistics for Various Phases –Nifty and Sensex

Phase BEAR –A

Indices Nifty Sensex

Period 21-4-1998 -03-12-98 21 -4-1998 -3-12-98 4 – 12-98 -21-02-2000 04 – 12-98 -22-02-2000 22-02-200021-09-01 23-02-2000 -21-09-01 24-09-200125-04-2003 24-09-2001 -25-04-2003 28-04-2003 -14-01-2004 28-04-2003 -14-01-2004 15-01-2004 -17-05-2004 15-01-2004 -17-05-2004 18-05-2004 -31-03-2008 18-05-2004 -31-03-2008

Minimum 808.7 2764.16 828.75 2849.82 854.2 2600.12 869.05 2617.35 929.5 2936.71 1388.75 4505.16 1446.1 4644

Maximum 1212.75 4280.96 1756.00 5933.56 1739.05 5810.17 1193.05 3712.74 1982.15 6194.11 1944.45 6064.10 6287.85 20873.0

Daily Average Return -0.2290 -0.2556 0.2585 0.2587 -0.1533 -0.1778 0.0218 0.0315 0.4211 0.4205 -0.3819 -0.3432 0.1138 0.1183

BULL –I

Nifty Sensex

BEAR –B

Nifty Sensex

OSCILLATING

Nifty Sensex

BULL – II

Nifty Sensex

BEAR – C

Nifty Sensex

BULL – III

Nifty Sensex

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