Comparative Study of Indian Stock Market with United States Stock market

Abstract

The stock market is witnessing heightened activities and is increasingly gaining

importance. In the current context of globalization and the subsequent integration of the
global markets this paper captures the trends, similarities and patterns in the activities and
movements of the Indian Stock Market in comparison to U.S Stock Market. New York
Stock Exchange (NYSE) and Bombay stock exchange (BSE) has been used in the study as
a part of study.
The time period used is from 2012-2013 to test the correlation between the Indian Stock
Exchanges and U.S. Stock Exchanges.

Introduction

Stock markets refer to a market place where investors can buy and sell stocks. The price at
which each buying and selling transaction takes is determined by the market forces (i.e.
demand and supply for a particular stock).

Let us take an example for a better understanding of how market forces determine stock
prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an
upward movement in its stock price. More and more people would want to buy this stock
(i.e. high demand) and very few people will want to sell this stock at current market price
(i.e. less supply). Therefore, buyers will have to bid a higher price for this stock to match
the ask price from the seller which will increase the stock price of ABC Co. Ltd. On the
contrary, if there are more sellers than buyers (i.e. high supply and low demand) for the
stock of ABC Co. Ltd. in the market, its price will fall down.

STOCK MARKET OF INDIA

In earlier times, buyers and sellers used to assemble at stock exchanges to make a
transaction but now with the dawn of IT, most of the operations are done electronically and
the stock markets have become almost paperless. Now investors’ don’t have to gather at the
Exchanges, and can trade freely from their home or office over the phone or through
Internet.

The Indian stock exchanges hold a place of prominence not only in Asia but also at the
global stage. The Bombay Stock Exchange (BSE) is one of the oldest exchanges across the
world, while the National Stock Exchange (NSE) is among the best in terms of
sophistication and advancement of technology. The Indian stock market scene really picked
up after the opening up of the economy in the early nineties. The whole of nineties were
used to experiment and fine tune an efficient and effective system. The corporate
governance rules were gradually put in place which initiated the process of bringing the
listed companies at a uniform level. On the global scale, the economic environment started
taking paradigm shift with the ‘dot com bubble burst’, 9/11, and soaring oil prices. The
slowdown in the US economy and interest rate tightening made the equation more
complex.
However after 2000 riding on a robust growth and a maturing economy and relaxed
regulations, outside investors- institutional and others got more scope to operate. This
opening up of the system led to increased integration with heightened cross-border flow of
capital, with India emerging as an investment ‘hot spot’ resulting in our stock exchanges
being impacted by global cues like never before.

STOCK MARKET OF U.S

The US stock market is the largest in the world. The numbers of listed companies are more
than 10 thousand and the market value totals US$20 trillion. Since there are many leading
enterprises of other countries choose to list on US stock markets, investors can trade stocks
that catch global attention through American security markets.

In order to attract more foreign investors, non-resident foreign companies, trusts, banks and
individuals can trade stocks, bonds, commodity contracts and options 100% free from U.S.
capital gains taxes.

Major stock market exchanges in US

The three major stock market exchanges in U.S. are New York Stock Exchange, American Stock
Exchange and Nasdaq.

1. New York Stock Exchange, NYSE

Based in Wall Street, New York City, NYSE is considered the longest histories, the largest,
and the most famous stock exchange. The numbers of listed companies are more than 3000.
The New York Stock Exchange is a sophisticated market which has strict listing requirement.

2. American Stock Exchange, AMEX

The AMEX is also located in New York City which is the third-largest stock exchange by
trading volume in the United States. More than 1000 enterprises are listed there and most of
them are small to mid-size stocks.
In 1998, the American Stock Exchange merged with Nasdaq to create "The Nasdaq-Amex
Market Group” where AMEX is an independent entity of the NASD parent company.

3. Nasdaq Stock Market

Nasdaq Stock Market operated since 1971, and having nearly 7000 corporations list their
shares on the Nasdaq. She is the second-largest stock exchange by trading volume in the
United States.
Three major indices in US

1. Dow Jones Industrial Average, DJIA

The Dow Jones Industrial Average was invented by Charles Dow back in 1896, which is the
oldest and single most watched index in the world. The DJIA is a price-weighted average of
30 significant stocks traded in United States.
With the current inclusion of only 30 stocks, critics argue that the DJIA is not a very accurate
representation of the overall market performance even though it is the most cited and most
widely recognized of the stock market indices.

2. S&P500
S&P500 is owned and maintained by Standard & Poor’s, a division of McGraw-Hill. 500
stocks had been chosen based on their market size, liquidity and industry grouping, among
other factors. Since the DJIA contains only 30 companies, most people agree that the
S&P500 is a better representation of the U.S. market. Therefore, it is one of the most
commonly used benchmarks for all over the world.

3. NASDAQ Composite Index

Launched in 1971, the Nasdaq Composite Index measures all domestic and international
based common type stocks listed on the Nasdaq Stock Market, which is calculated under a
market capitalization weighted methodology.
The Nasdaq Composite Index measures all NASDAQ domestic and international based
common type stocks listed on The Nasdaq Stock Market.

Origin of BSE (Bombay Stock Exchange):

It is the very first stock exchange in the whole Asia. It is around in 1850 when one Parsi
man and four Gujarati men who are the stock brokers under banyan tree and near the
Mumbai’s Town Hall, locations of the meetings changes as the people increases. This
banyan tree is still available in the Horniman Circle Park in the city of Mumbai. It has
become a huge group in around 1874 of around 22 stock brokers and they move to Dalal
Street and in the next year there emerges a new group with name ‘The Native Share &
Stock Brokers Association’. In January 1899 the Brokers Hall is inaugurated by James M.
Maclean. As the First World War ended this BSE office is shifted to a building in 1928
which is near the Bombay Town Hall at present.

In the later 1950s it comes under the notice of the Government of India. It comes as BSE
SENSEX in the late 1980s and also gives BSE a mean to measure the performance of the
stocks and exchange. One of the famous and leading stock brokers of that time is
Premchand Roychand, he set out many new traditions and rules in the market which are
still followed in the market.
Origin of NYSE (New York Stock Exchange):

On May 17, 1792, twenty-four stockbrokers gathered outside 68 Wall Street under a
buttonwood tree to sign an agreement that would establish the rules for buying and selling
bonds and shares of companies. The Buttonwood Agreement, as it is known, is so named
because the tree served as the regular meeting place for these pioneers of Wall Street. The
signers of the Buttonwood Agreement drafted their first constitution on March 8th, 1817,
and named their nascent organization the New York Stock & Exchange Board.
In 1863, this name was shortened to its modern form, the New York Stock Exchange,
which became known as the NYSE, one of the best-known financial industry brands in the
world. Membership on the NYSE has been held as a valuable property since 1868. Until
the NYSE went both electronic and public in April 2006, the exchange was a membership-
only organization. You could only join the NYSE by purchasing existing seats, which were
limited to a total of 1,366.

Problem:

The recent global economic situation has witnessed immense highs and lows including
some unfortunate happenings related to stock market. This has surged a debate on is it
really that easy to make money in Indian stock market today. Timing is the most important
factor while investing in stock market. This fluctuates on rapid basis so one cannot be
completely dependent on this for money until and unless you are in this business for a long
time.

A weak currency has historically had an adverse impact on equity markets, given their
sensitivity to FII flows. Currently FIIs hold close to 24% of BSE-500 companies. Any
expectation of structural weakness in the rupee sours their return expectations. This can
lead to outflows, which can further pressure the rupee. Hence, the regulators need to calm
the markets by taking measures to boost capital flows and manage expectations. However,
on an aggregate basis, companies in the listed space may see positive earnings as they
operate in sectors that benefit from a weaker currency.

Objectives:

The main objective of this study is to capture the trends, similarities and patterns in the
activities and movements of the Indian Stock Market in comparison to U.S. The aim is to
help the investors (current and potential) understand the impact of important happenings on
the Indian Stock exchange. This is especially relevant in the current scenario when the
financial markets across the globe are getting integrated into one big market and the impact
of one exchange on the other exchanges.
Methodology:

For the comparative analysis of the stock exchanges, the period chosen is from 2nd April
2012 to 1st August 2013. This period is divided into different sets of months in order to
capture the effect and movement of stock exchanges with each other during different
periods.
Stock exchanges representing various regions used in this study include NSE (India) and
NYSE (USA),

Analysis:

India Stock Market (SENSEX)

From 1979 until 2013, India Stock Market (SENSEX) averaged 5797 Index points reaching
an all time high of 21005 Index points in November of 2010 and a record low of 113 Index
points in December of 1979. The SENSEX (BSE30) is a major stock market index which
tracks the performance of 30 major companies listed on the Bombay Stock Exchange. The
companies are chosen based on the liquidity, trading volume and industry representation.
The SENSEX, is a free-float market capitalization-weighted index. The Index has a base
value of 100 as of 1978-79
United States Stock Market (Dow Jones)

From 1912 until 2013, the United States Stock Market (Dow Jones) averaged 2337 Index
points reaching an all time high of 15658 Index points in August of 2013 and a record low
of 41 Index points in July of 1932. The Dow Jones Industrial Average is one of the most
closely watched U.S. benchmark indices. It is a price-weighted index which tracks the
performance of 30 large and well-known U.S. companies that are listed mostly on the New
York Stock Exchange. The Dow Jones Industrial Average has a base value of 40.94 as of
May 26, 1896
 Parameters BSE NYSE
DOW Jones Industrial
Name SENSEX
Average
No. of Companies 30 30
Free Float market
Method of calculation Weighted Average
capitalization method

Conclusion:

The Indian exchanges are ready to make the transition should the government decides to
further relax the regulations and open up. The financial sector as a whole, with the stock
markets as its indicator, has indeed come a long way and are ready for the next level with
regards to efficient trading and variety in the instruments traded.

It is clearly found that the stock markets do impact each other, more so in the recent times.
This has been due to the fact that ‘cross holdings’ are increasingly becoming common
wherein the geographical barrier is dissolving with respect to investing.

There are also issues regarding the extent to which the sophisticated systems of the stock
exchanges (BSE) are utilized in terms of the volume and frequency of transactions and the
range of instruments traded. The commodity segment, derivatives and such other segments
are yet to see activities like the equity segment of the market. The reasons that can be
attributed to this is the fact that it has been only few years (derivatives started in 2000) that
the various segments, apart from equity and debt, have started operating and hence it is
reasonably nascent compared to its global counterparts. It would, therefore, not be
unjustified to say that the system is still evolving and it would take some time not only to
attain efficiency of operation, but also to generate increased interest and awareness about
the various other segments of the market. Then only can we expect the operations to match
its global counterparts in terms of volumes, frequency and variety of instruments traded.

References:

Great Lakes Herald – April 2007 Volume 1, Issue 1 by Great Lakes Institute of
Management, Chennai

Becker, K, Finnerty, J., & Gupta, M. (1990): ‘The Intertemporal Relation between the
US and Japanese Stock Markets’, Journal of Finance, 45, 1297-1306.
Websites Referred

www.bseindia.com
www.nse-india.com
www.nyse.com
http://capitalmind.in/2012/09/how-the-indian-stock-market-compares-with-the-rest-of-the-world-
september-2012/
http://www.tradingeconomics.com/
http://www.advisorperspectives.com/commentaries/compass_120711.php