CHAPTER 1

1.1 INTRODUCTION

Meaning of Stock Exchange

A stock exchange is an important factor in the capital market. It is a secure place
where trading is done in a systematic way. Here, the securities are bought and
sold as per well-structured rules and regulations. Securities mentioned here
includes debenture and share issued by a public company that is correctly listed
at the stock exchange, debenture and bonds issued by the government bodies,
municipal and public bodies.

Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds
are sold in a stock exchange. It can enforce rules and regulation on the brokers
and firms that are enrolled with them. In other words, a stock exchange is a
forum where securities like bonds and stocks are purchased and traded. This can
be both an online trading platform and offline (physical location)
A stock exchange is a marketplace where securities, such as stocks and bonds,
are bought and sold. Bonds are typically traded Over-the-Counter (OTC), but
some corporate bonds can be traded on stock exchanges. Stock exchanges allow
companies to raise capital and investors to make informed decisions using real-
time price information. Exchanges can be a physical location or an electronic
trading platform. Though people are typically familiar with the image of the
trading floor, many exchanges now use electronic trading.
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 A stock exchange, securities exchange, or bourse, is an exchange where
stockbrokers and traders can buy and sell securities, such as shares of stock,
bonds, and other financial instruments. Stock exchanges may also provide
facilities for the issue and redemption of such securities and instruments and
capital events including the payment of income and dividends.[citation needed]
Securities traded on a stock exchange include stock issued by listed companies,
unit trusts, derivatives, pooled investment products and bonds. Stock exchanges
often function as "continuous auction" markets with buyers and sellers
consummating transactions via open outcry at a central location such as the floor
of the exchange or by using an electronic trading platform.
To be able to trade a security on a certain stock exchange, the security must be
listed there. Usually, there is a central location at least for record keeping, but
trade is increasingly less linked to a physical place, as modern markets use
electronic communication networks, which give them advantages of increased
speed and reduced cost of transactions. Trade on an exchange is restricted to
brokers who are members of the exchange. In recent years, various other trading
venues, such as electronic communication networks, alternative trading systems
and "dark pools" have taken much of the trading activity away from traditional
stock exchanges.

1.2WHAT IS STOCK EXCHANGE

A stock exchange, share market or bourse 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 and other pooled investment products and
bonds. To be able to trade a security on a certain stock exchange, it has to be listed
there. Usually there is a central location at least for recordkeeping, but trade is less and
less linked to such a physical place, as modern markets are electronic networks, which
gives them advantages of speed and cost of transactions. Trade on an exchange is by
members only.
The initial offering of stocks and bonds to investors is by definition done in the
primary market and subsequent trading is done in the secondary market. A stock
exchange is often the most important component of a stock market. Supply and
demand in stock markets are driven by various factors which, as in all free markets,
affect the price of stocks (see stock valuation). There is usually no compulsion to issue
stock via the stock exchange itself, nor must stock be subsequently traded on the
exchange. Such trading is said to be off exchange or over-the-counter. This is the usual
way that bonds are traded. Increasingly, stock exchanges are part of a global market for
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securities.

A stock exchange is simply a market that is designed for the sale and purchase of
securities of corporations and municipalities. A stock exchange sells and buys stocks,
shares, and other such securities. In addition, the stock exchange sometimes buys and
sells certificates representing commodities of trade. This article discusses:

What is the principle behind the operation of stock exchanges?

 What are the functions and processes involved in stock exchanges?
 Know in detail about major stock exchanges Understanding what a stock exchange is
and how an online stock exchange works, can help you make the right decisions when
it comes to your investment. Being able to follow the NY stock exchange and being
able to understand the NASDAQ stock exchange numbers that appear on your news
every evening can help you become a better investor and can help you profit more from
the stock market. The institution where this buying and selling of shares essentially
takes place is the Stock Exchange. In the absence of stock exchanges, ie. Institutions
where small chunks of businesses could be traded, there would be no modern business
in the form of publicly held companies. Today, owing to the stock exchanges, one can
be part owners of one company today and another company tomorrow; one can be part
owners in several companies at the same time; one can be part owner in a company
hundreds or thousands of miles away; one can be all of these things. Thus by enabling
the convertibility of ownership in the product market into financial assets, namely
shares, stock exchanges bring together buyers and sellers (or their representatives) of
fractional ownerships of companies. And for that very reason, activities relating to
stock exchanges are also appropriately enough, known as stock market or security
market.
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Also a stock exchange is distinguished by a specific locality and characteristics of its
own, mostly a stock exchange is also distinguished by a physical location and
characteristics of its own. In fact, according to H.T.Parekh, the earliest location of the
Bombay Stock Exchange, which for a long period was known as “the native share and
stock brokers’ association”, was probably under a tree around 1870! The stock
exchanges are the exclusive centers for the trading of securities.

I) History
In 11th century France the courtiers de change was concerned with managing
and regulating the debts of agricultural communities on behalf of the banks. As these
men also traded in debts, they could be called the first brokers. Some stories suggest
that the origins of the term "bourse" come from the Latin bursa meaning a bag because,
in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front
of the house where merchants met. However, it is more likely that in the late 13th
century commodity traders in Bruges gathered inside the house of a man called Vander
Burse, and in 1309 they institutionalized this until now informal meeting and became
the "Bruges Bourse". The idea spread quickly around Flanders and neigh boring
counties and "Bourses" soon opened in Ghent and Amsterdam. The house of the
Beurze family on Vlaamingstraat Bruges was the site of the world first stock
Exchange, circa 1415. The term Bourse is believed to have derived from the family
name Beurze. In the middle of the 13th century, Venetian bankers began to trade in
government securities. In 1351, the Venetian Government outlawed spreading rumors
intended to lower the price of government funds. There were people in Pisa, Verona,
Genoa and Florence who also
began trading in government
securities during the 14th century.
This was only possible because
these were independent city states
ruled by a council of influential
citizens, not by a duke.
When people talk stocks,
they are usually talking about
companies listed on major stock
exchanges like the New York Stock
Exchange (NYSE) or the Nasdaq. Many of the major American companies are listed on
the NYSE, and it can be difficult for investors to imagine a time when the bourse wasn't
synonymous with investing and trading stocks. But, of course, it wasn't always this
way; there were many steps along the road to our current system of stock
exchanges. You may be surprised to learn that the first stock exchange thrived for
decades without a single stock being traded.
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In this article, we will look at the evolution of stock exchanges, from the Venetian states
to the British coffeehouses, and finally to the NYSE and its brethren.

i) The First Stock Exchange—Sans the Stock

According to our research, Belgium boasted a stock exchange as far back as 1531 in
Antwerp.4 Brokers and moneylenders would meet there to deal with business,
government, and even individual debt issues. It is odd to think of a stock exchange that
dealt exclusively in promissory notes and bonds, but in the 1500s there were no real
stocks. There were many flavors of business-financier partnerships that produced
income as stocks do, but there was no official share that changed hands.

ii) All Those East India Companies

In the 1600s, the Dutch, British, and French governments all gave charters to companies
with East India in their names. On the cusp of imperialism's high point, it seems like
everyone had a stake in the profits from the East Indies and Asia except the people
living there. Sea voyages that brought back goods from the East were extremely risky
—on top of Barbary pirates, there were the more common risks of weather and poor
navigation.
To lessen the risk of a lost ship ruining their fortunes, ship owners had long been in the
practice of seeking investors who would put up money for the voyage—outfitting the
ship and crew in return for a percentage of the proceeds if the voyage was successful.
These early limited liability companies often lasted for only a single voyage. They were
then dissolved, and a new one was created for the next voyage. Investors spread their
risk by investing in several different ventures at the same time, thereby playing the
odds against all of them ending in disaster.
When the East India companies were formed, they changed the way business was done.
These companies issued stock that would pay dividends on all the proceeds from all the
voyages the companies undertook, rather than going voyage by voyage. These were the
first modern joint-stock companies. This allowed the companies to demand more for
5
their shares and build larger fleets. The size of the companies, combined with royal
charters forbidding competition, meant huge profits for investor

iii) The New York Stock Exchange

The first stock exchange in London was officially formed in 1773, a scant 19 years
before the New York Stock Exchange.10 Whereas the London Stock Exchange (LSE)
was handcuffed by the law restricting shares, the New York Stock Exchange has dealt
in the trading of stocks, for better or worse, since its inception. The NYSE wasn't the
first stock exchange in the U.S., however. That honor goes to the Philadelphia Stock
Exchange, but the NYSE quickly became the most powerful.
Formed by brokers under the spreading boughs of a buttonwood tree, the New York
Stock Exchange made its home on Wall Street. The exchange's location, more than
anything else, led to the dominance that the NYSE quickly attained. It was in the heart
of all the business and trade coming to and going from the United States, as well as the
domestic base for most banks and large corporations. By setting listing requirements and
demanding fees, the New York Stock Exchange became a very wealthy institution.

The NYSE faced very little serious domestic competition for the next two centuries. Its
international prestige rose in tandem with the burgeoning American economy, and it
was soon the most important stock exchange in the world. The NYSE had its share of
ups and downs during the same period, too. Everything from the Great Depression to
the Wall Street bombing of 1920 left scars on the exchange. The 1920 bombing,
believed to have been carried out by anarchists, left 38 dead and also literally
scarred many of Wall Street's prominent buildings. The less literal scars on the
exchange came in the form of stricter listing and reporting requirements.
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CHAPTER 2: OBJECTIVE

2.1 Objectives of the Study

The objective of this study is to document relevant literary works undertaken on the
different aspects in the area of stock market liquidity after the financial crisis of 2008
and to quantitatively analyze the literature available on stock market liquidity.

i) Data and Method

a) Data
For the attainment of objectives, the study has been confined to the research
articles that have been published in the various journals during the recent years after
the financial crisis, that is, 2009–April 2020, and was sourced from the
“ScienceDirect” database. For the study, a total of 439 research papers have been
selected which have appeared in 64 journals, namely, Applied Economics; Applied
Economics Letters; Borsa Istanbul Review; China Economic Review; Decision
Support Systems; Economic Modelling; Economic Systems; Economics Letters;
Emerging Markets Review; Energy Economics; European Economic Review;
Explorations in Economic History; Finance Research Letters; European Research on
Management and Business Economics; Global Finance Journal; Habitat International;
International Journal of Production Economics; International Business Review;
International Economics; International Journal of Forecasting; International Review of
Economics and Finance; International Review of Financial Analysis; Journal of
Accountancy; Public Policy; Journal of Financial Intermediation; Japan and the World
Economy; Journal of Accounting and Economics; Journal of Asian Economics; Journal
of Banking & Finance; Journal of Behavioral and Experimental Finance; Journal of
Business Research; Journal of Contemporary Accounting & Economics; Journal of
Corporate Finance; Journal of Development Economics; Journal of Econometrics;
Journal of Economic Behavior & Organization; Journal of Economic Theory; Journal
of Economics and Business; Journal of Empirical Finance; Journal of Financial
Economics; Journal of Financial Markets; Journal of Financial Stability; Journal of
International Financial Markets, Institutions & Money; Journal of International Money
and Finance; Journal of Multinational Financial Management; Journal of Policy
Modeling; Journal of the Japanese and International Economies; Journal of Accounting
and Economics; Journal of Economic Dynamics & Control; Journal of Economic
Theory; Macroeconomics and Finance in Emerging Market Economies; North
American Journal of Economics and Finance; Pacific-Basin Finance Journal; Physica
A; Procedia–Social and Behavioral Sciences; Procedia Computer Science; Procedia
Economics and Finance; Research in International Business and Finance; Research in
Economics; Review of Economic Dynamics; Review of Financial Economics; The

7
 Journal of Finance and Data Science; The Quarterly Review of Economics and
Finance; and Transportation Research Part E.

b) Method

The research articles on stock market liquidity were sourced from the
ScienceDirect database, which provides access to a wide range of articles undertaken in
heterogeneous contexts in comparison with other similar databases. The reason for
selecting a single database for article extraction was mainly to enable comprehensive
coverage of a wide range of literary works on the topic from a single source. The
research articles were accessed from the database by using the keyword “market
liquidity” and the time filter of 2009 to 2020. Based on abstract reading, if stock
market liquidity is highlighted as the focal point, then the article was included for
review. Finally, a total of 439 articles that were exclusively based in the area of stock
market liquidity were extracted. Furthermore, the content of these articles was
segregated into different categories, namely, Year of Publication, Title of the Paper,
Number of Authors, Country of the Authors, Name of the Publishing Journal,
Objectives of the Study, Liquidity Measures Used, Findings, and Conclusions.
Based on the objectives undertaken for study by the selected research articles, they
were categorized into below mentioned four categories:

 Measurement of stock market liquidity,

 Factors influencing stock market liquidity,
 Stock market liquidity and expected returns,
 Stock market liquidity risk and expected returns.

Furthermore, to stimulate refined studies, only 91 pertinent studies were selected

based on their key findings across these categories and were accordingly summarized.
On the contrary, the information about the significant contributions made by the
different authors, countries, and journals across 439 research articles has been depicted
graphically to facilitate quantitative analysis of the available literature.
Analysis
Identification and Analysis of Key Aspects Studied Concerning Stock Market
Liquidity

By analyzing the literature on stock market liquidity, the following key aspects have
been identified relating to which the reviewed studies have been undertaken in the area
of stock market liquidity:

 Measurement of stock market liquidity,

 Factors influencing stock market liquidity,
 Stock market liquidity and expected returns,
 Stock market liquidity risk and expected returns.
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Figure 1 exhibits the key aspects studied concerning stock market liquidity, and also
gives a quick aspect wise insight about the number of papers published and the highest
count of the contribution of authors (number-wise and country-wise) and appearance of
research papers in journals. It can be seen that the majority of the studies have been
attentive toward evaluating the factors influencing stock market liquidity (250 papers),
whereas a nominal number of studies have explored the dynamic relationship between
stock market liquidity and expected returns (116 papers). Also, a handful of studies
have been taken upon the measurement of stock market liquidity (46 papers) and
analyzed the relationship between stock market liquidity risk and expected returns (27
papers). In addition, these aspects have been mainly studied by the authors from the
United States and have been commonly published in the Journal of Banking &
Finance.

9
Furthermore, the subthemes studied (summarized in Figure 2) and the significant results
that are drawn in the reviewed studies are highlighted below according to the above-
identified key aspects.

 Other Exchanges
There are many other exchanges located throughout the world, including exchanges
that trade stocks and bonds as well as those that exchange digital currencies.

 Asia
The Tokyo Stock Exchange (TSE) is the largest in Japan. The TSE has more than
3,700 listed companies, with a combined market capitalization of more than $5.6
trillion.20

The Shanghai Stock Exchange (SSE) is the largest in mainland China. Many
investments are traded on the exchange, including stocks, bonds, and mutual funds.
The Shenzhen Stock Exchange (SZSE) is the second-largest stock exchange operating
independently in China.

 Europe
Euronext is Europe's largest stock exchange, and although it has undergone multiple
mergers, it was initially formed by the mergers of the Amsterdam, Paris, and Brussels
stock exchanges. The London Stock Exchange (LSE) is located in the United Kingdom
and is the second-largest exchange in Europe.

The most popular index within the LSE is the Financial Times Stock Exchange (FTSE)
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 100 Share Index. The “Footsie” contains the top 100 well-established publicly traded
companies or blue-chip stocks.

 Digital Exchanges
Coinbase is the leading cryptocurrency exchange in the United States. Coinbase has an
advanced trading platform that facilitates cryptocurrency trades for retail investors and
custodial accounts for institutions.

II) Functions of Stock Exchange

Following are some of the most important functions that are performed by stock
exchange:

1. Role of an Economic Barometer: Stock exchange serves as an economic barometer

that is indicative of the state of the economy. It records all the major and minor changes

11
 in the share prices. It is rightly said to be the pulse of the economy, which reflects the
state of the economy.
2. Valuation of Securities: Stock market helps in the valuation of securities based on the
factors of supply and demand. The securities offered by companies that are profitable
and growth-oriented tend to be valued higher. Valuation of securities helps creditors,
investors and government in performing their respective functions.
3. Transactional Safety: Transactional safety is ensured as the securities that are traded in
the stock exchange are listed, and the listing of securities is done after verifying the
company’s position. All companies listed have to adhere to the rules and regulations as
laid out by the governing body.
4. Contributor to Economic Growth: Stock exchange offers a platform for trading of
securities of the various companies. This process of trading involves continuous
disinvestment and reinvestment, which offers opportunities for capital formation and
subsequently, growth of the economy.
5. Making the public aware of equity investment: Stock exchange helps in providing
information about investing in equity markets and by rolling out new issues to
encourage people to invest in securities.
6. Offers scope for speculation: By permitting healthy speculation of the traded
securities, the stock exchange ensures demand and supply of securities and liquidity.
7. Facilitates liquidity: The most important role of the stock exchange is in ensuring a
ready platform for the sale and purchase of securities. This gives investors the
confidence that the existing investments can be converted into cash, or in other words,
stock exchange offers liquidity in terms of investment.
8. Better Capital Allocation: Profit-making companies will have their shares traded
actively, and so such companies are able to raise fresh capital from the equity market.
Stock market helps in better allocation of capital for the investors so that maximum
profit can be earned.
9. Encourages investment and savings: Stock market serves as an important source of
investment in various securities which offer greater returns. Investing in the stock
market makes for a better investment option than gold and silver.

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CHAPTER 3: IMPORTANCE AND SCOPE OF THE STUDY

i) Importance of Stock Exchange :

The stock exchange is the mirror of the economy of any country. It helps industries and
commerce to develop a country. In this regard the importance of stock exchange is
massive. To make a country economically strong and dynamic there is no alternative to
the stock exchange. The importance of the stock exchange are given below:
 Formation of capital: To form the capital for industries, it plays the key role.
Though banks and other financial institutions help to form capital but among
them stock exchange is vital for collecting long-term huge capital.
 Inspiring savings: Stock exchanges inspire individuals to reducing current
consumption and inspire to increases savings. By this means individuals can be
benefited and thus the industries as well.
 The mobility of resources: It makes the economy dynamic by helping in a
proper mobilization of resources from households to companies. Mobilization
of resources is highly required for any country’s economic development.
 Helping in industrialization: It helps in industrialization. Stock exchange
provides the required capital for the industries. The companies can easily
collect the necessary amount of capital by issuing shares or selling debentures
in the stock market.
 Improving living standard: It creates attractive investment sectors for the
mass people. One can gain easily by investing his savings in the market. Thus
the stock market helps in improvement of living standard of general people.
 Strong economic base: It helps industrialization through mobilization of
resources. Thus it makes the economy strong. For a strong economy, the
industrial development is essential and the stock exchange act here effectively.
 Safety of investment: It secures the investment. Stock exchange maintains
rules and regulation to guard the market against fraudulence.
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  Proper valuation of share and security: It has specific rules for valuation for
the stocks and securities. It publishes the daily transaction from that the
investors can be aware of the price of shares and securities.
 Ready market: Stock exchange is ready and a secondary market. Like product
and service market, one can buy and sell financial products from and to the
stock market. The stock market is almost a financial product-oriented market.
 Proper utilization of savings: Stock exchange helps the proper utilization of
savings of general people. It brings the savings and form capital for the
companies, thus utilizes properly the savings.
After all, the stock exchange is an important economic institution. It helps both the
investors and the companies for mutual benefits. It deals with great importance to the
development of the economy of a country.

ii) Features of Stock Exchange:

4 main features of stock exchange are as follows:

(1) Organised Market:

Stock exchange is an organised market. Every stock exchange has a management
committee, which has all the rights related to management and control of exchange. All
the transactions taking place in the stock exchange are done as per the prescribed
procedure under the guidance of the management committee.

(2) Dealings in Securities Issued by Various Concerns:

Only those securities are traded in the stock exchange which is listed there. After
fulfilling certain terms and conditions, security gets listed on the stock exchange.

(3) Dealing only through Authorised Members:

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Investors can sell and purchase securities in stock exchange only through the
authorised members. Stock exchange is a specified market place where only the
authorised members can go. Investor has to take their help to sell and purchase.

(4) Necessary to Obey the Rules and Bye-laws:

While transacting in Stock Exchange, it is necessary to obey the rules and bye-laws
determined by the Stock Exchange.

CHAPTER 4 : LITERATURE REVIEW

An understanding of the existing literature and identifying the prospective areas

for future research on a specific research topic is of prime importance to a researcher.
Content analysis enables in drawing meaningful conclusions from the existing research
works based on which a researcher can effectively carry out further studies. Hart
(1998) mentions that the review of literature enables a researcher to better understand
his research topic and develop his capability to find new approaches in the existing
context. Downe-Wamboldt (1992) defines it as a technique that broadens the
understanding of phenomena, which further enables in making distinct and effective
conclusions. Castleberry and Nolen (2018) state that by understanding the reviewed ideas
from the existing work, a researcher can transform them into a unique one by analyzing
the same ideas differently.

By considering the need and benefits of content analysis, the current study
observed that a handful of studies have been eager in reviewing the existing literature
on stock market liquidity. Benson et al. (2015) analyzed the literature available on
liquidity in financial markets. The study reviewed 113 research papers on liquidity and
concluded that market liquidity was essentially studied concerning corporate finance,
corporate announcements, stock returns, macro policy announcements, and investment
management. Also, Amihud et al. (2006) analyzed the studies that have evaluated the
effect of liquidity and liquidity risk on stock returns. The study summarized the
liquidity asset pricing theories and significant results in support of these
theories. Kumar and Misra (2015) evaluated 95 articles and presented a review of
literature on various aspects of stock market liquidity like measurement of liquidity,
determinants of liquidity, intraday movements, and liquidity effects on firm value.
Recently, Díaz and Escribano (2020) reviewed 177 articles and discussed the
dimensional liquidity measures which have been used by researchers over the years in

15
determining the liquidity of equity, bond, and treasury markets.

The earlier literature review papers on stock market liquidity have considered an
inconsistent number of studies from various research databases while some have
examined a few studies that highlight different perspectives of stock market liquidity.
Also, it has been observed that the post-crisis period articles have not been extensively
reviewed. Remarkably, these studies have proposed diverse views on the viability of
dynamics in market liquidity in the context of different market structures and time
durations. A focused review of their empirical contributions can significantly enable a
researcher to contribute further in improving the quality of work in the area of stock
market liquidity that can help the benefiting stakeholders in effective policy and
strategy formulations. In addition, the previous literature reviews have undertaken only
a theoretical evaluation of the available literature and do not highlight the relevant
contributing journals, authors, and countries, and the recent trend in publishing studies
on stock market liquidity which are also important inputs for researchers to conduct
further studies on this topic. Thus, the current work emphasizes reducing these gaps
and provides meaningful contributions from a large number of previous researches in
the area of stock market liquidity.

i) Measurement of stock market liquidity

A liquid market is generally referred to as the market in which a large quantity is

traded without any delay at lower transaction costs with minimum price impact. The
previous literature proposes four main characteristics of liquidity, that is, trading
quantity, execution time, transaction cost, and price impact. Thus, the reviewed studies
have measured liquidity in the stock market by using a variety of liquidity measures
that can fairly capture the key market liquidity characteristics, that is, depth (volume or
quantity measure), breadth (price impact measure), immediacy (time or speed
measure), and transaction costs (spread or transaction cost measure). Moreover, these
measures were computed either based on intraday (high-frequency) data or daily,
weekly, monthly, quarterly, yearly (low-frequency) data. Although measures based on
high-frequency data have been mainly in practice, Goyenko et al. (2009) evidenced
that the low-frequency measures can be fairly used over high-frequency ones to
measure liquidity. In addition, Lee (2015) suggested that measures based on low-
frequency data enable in studying liquidity over a long period and across different
market structures.
The reviewed studies have tested and proposed the best performing measures of
liquidity under different market systems. Spread and volume-related liquidity measures
were used by Hallin et al. (2011) and evidenced that both the measures are negatively
correlated and give identical information about market liquidity and thus can be used as
complementary to the other. In the context of liquidity in developing markets, Marshall
et al. (2013) found that Gibbs, Amihud, and Amivest measures prove to be effective

16
measures, whereas in an emerging market, Będowska-Sójka and Echaust (2020) found
that the Closing Quoted Spread measure based on daily data was the best performing
liquidity measure during the periods of extreme liquidity. Furthermore, Będowska-
Sójka (2018) made a comparison between different liquidity measures and concluded
that the Amihud Illiquidity ratio evolves as the best transactional cost measure
and Karstanje et al. (2013) proved that zero return measure is a very strong and reliable
measure for determining the timing of liquidating the trading positions.
during high volatility. The MDH model facilitates in extracting that part of the
volume which is exclusively affected by liquidity levels during high volatility.
Although, different measures of liquidity have been used and proposed in the
literature, Chai et al. (2010) concluded that there is no best measure that can be used to
measure the market liquidity because every type of measure captures different aspects
of market liquidity in different market systems and conditions. Even Goyenko et al.
(2009) suggest that a researcher should choose a liquidity measure depending on the
objective of his study.

ii) Factors influencing stock market liquidity

Researchers have shown a keen interest in analyzing the effect of different factors
influencing liquidity of individual stocks and of the overall market, and have obtained
significant results. The studies have revealed a significant impact of regulatory policy
announcements on liquidity. Fernández-Amador et al. (2013) found that an
expansionary monetary policy announcement positively influenced stock market
liquidity of small-sized stocks. Busch and Lehnert (2014) analyzed the effect of
remedial measures taken for revival of the German economy from the 2008 crisis on
stock liquidity levels and concluded that the measures in the form of expansionary
monetary policy and imposition of short-selling bans in the stock market led to an
improvement in stock liquidity, whereas the bank’s guarantees given for firm’s
liabilities deteriorated the liquidity and such effects were more pronounced in case of
low traded stocks. In addition, Hvozdyk and Rustanov (2016) found that the
introduction of financial transaction tax improved market liquidity, whereas its actual
implementation increased transaction cost and thereby lowered the liquidity levels.
Concerning the emerging market, Reddy et al. (2017) studied and found that the Indian
stock market liquidity is highly influenced by the policies announced by its
government and financial institutions. On the contrary, Sensoy (2016) and Ekinci et al.
(2019) documented that emerging market is very sensitive to the announcements made
by developed economies. Their study revealed that announcements relating to
monetary policy, interest rates, and gross domestic product (GDP) of the U.S. economy
strongly determined liquidity of the Turkish stock market under study. In terms of
macroeconomic variables, money supply, government expenditure, private borrowing,
bank rate, short-term interest rate, and government borrowing were found to be the key
determinants of market liquidity across different sectors of the stock market

17
(Chowdhury et al., 2018). Also, Zheng and Su (2017) observed that global oil demand
shocks cause a significant negative effect on the liquidity of the Chinese stock market.
.

iii) Stock market liquidity and expected returns

Another interesting area that has been explored is the effect of market liquidity
on stock returns. Shieh et al. (2012) found that any change in liquidity levels of stock
results in a huge impact on stock returns. Lam and Tam (2011) concluded that liquidity
is the most important factor influencing stock returns even after controlling other
determinants of stock returns. A positive effect of lower liquidity was evidenced on
expected stock returns by Asparouhova et al. (2010). Similar results were obtained
by Chang et al. (2010) and Dinh (2017) while evaluating the liquidity of stocks across
different sizes and by Baradarannia and Peat (2013) during the pre-crisis period.
Furthermore, Hearn (2010, 2011) found that market liquidity plays an important role in
determining stock returns mainly in less competitive stock markets as these markets are
characterized to have a high cost of equity.
Furthermore, the effect of liquidity infused during selling stock was found to be
more on expected stock returns than the one during buying a stock (Brennan et al.,
2012). Also, Loukil et al. (2010) found a positive effect of both present and past
illiquidity on expected stock returns wherein the return of small size stocks was highly
affected by illiquidity over some time. In addition, Arjoon et al. (2016) found that the
presence of institutional ownership determines positive relationship between liquidity
and stock returns, whereas Bradrania et al. (2015) proved that liquidity influences the
expected returns since it crucially determines the relationship between expected returns
and expected volatility. Besides, Wang and Chen (2012) developed and tested various
asset pricing models to effectively obtain the relationship between liquidity and stock
returns.
On the contrary, studies (Lischewski & Voronkova, 2012; Nguyen & Lo, 2013)
found no empirical evidence supporting the effect of liquidity on expected stock
returns. In frontier markets, Stereńczak et al. (2020) observed that liquidity does not
affect returns because they are less globally integrated. Also, Gârleanu
(2009) suggested that liquidity does not have any impact on stock returns because
different traders employ different trading strategies according to their distinct trading
objectives.

iv) Stock market liquidity risk and expected returns

In addition to the level of stock market liquidity, market liquidity risk is also found to
be an influencing factor of expected returns. The market liquidity risk has been
favorably measured as the co-movement between stock and market liquidity, stock
liquidity and market return, and market liquidity and stock return in related studies
18
 (Altay & Çalgıcı, 2019; Bradrania & Peat, 2014; K. H. Lee, 2011; Vu et al., 2015).
Bradrania and Peat (2014) found that liquidity affects expected returns due to the
presence of market liquidity risk. The expected return showed the presence of liquidity
premium which increased during high liquidity risk and thereby showed that such risk
was priced in the assets. The study also suggested that the Liquidity-adjusted Capital
Asset Pricing Model (LCAPM) is the most appropriate approach to identify liquidity
risk premium in returns. Furthermore, Vu et al. (2015) used the LCAPM approach and
found that liquidity risk is higher in the bearish market which in turn positively
affected the stock returns even after controlling the other factors affecting the returns.
But during the financial crisis of 2008, Dang and Nguyen (2020) evidenced a negative
effect of liquidity risk on stock returns across diverse international markets.
Similarly, Nneji (2015) conducted sectoral analysis and found that liquidity risk highly
influenced stock prices and thereby any hike in liquidity risk would increase the
possibility for a stock market crash.
Chiang and Zheng (2015) found that the market illiquidity risk positively affects the
excess stock returns in G7 countries. The results of the portfolio analysis indicate that
the effect of market illiquidity risk is more pronounced on the returns of large, growth,
liquid, and low-risk stocks. Even Foran et al. (2015) found a positive cross-sectional
effect of market liquidity risk on U.K. equity stock returns, whereas stock liquidity risk
had a negative effect. Using principal components analysis, the study also obtained
common market-specific liquidity risk factors affecting the liquidity across the stocks
thereby justifying a strong effect on stock returns. K. H. Lee (2011) found that
international portfolio returns are also determined by market liquidity risks in addition
to market risks and that this result varies across different economies.
Liang and Wei (2012) found that the premium in the prices of stocks of
developed countries is due to the presence of higher market liquidity risk of their
respective countries. It was also found that this risk is higher in those countries where
there are large company governing boards and more insider trading activities. Lin et al.
(2014) affirmed that when prices react slowly to market-wide information, the
investors refrain from trading in such stocks and their returns rise on account of
liquidity risk of the market, whereas Cao and Petrasek (2014) concluded that the risk-
averse investors exert a huge selling pressure during low liquidity conditions and
thereby lead to a negative relationship between liquidity risk and returns. Also, the
study suggested that concentrated ownership is beneficial in lowering liquidity risk
because such investors do not panic during the crisis. On the contrary, Sensoy
(2017) concluded that highly concentrated ownership in stocks, especially by
institutional investors, contributes to high liquidity risk.
Quantitative Analysis of the Literature on Stock Market Liquidity
This section presents a quantitative analysis of the 439 reviewed research articles based
on

 number of research papers published—year wise,

 contribution of authors—number wise,
19
 country-wise contribution of authors,
 appearance of research papers in journals.

Analysis based on number of research papers published—Year wise

It was observed that in the recent past years, many research works have been carried
out in the area of stock market liquidity. In our sample, the highest number of 56
research papers has been published in the year 2018 followed by 55 research papers in
the year 2014, 45 research papers in the year 2016, 44 research papers in the year 2017,
43 research papers in the year 2009, 37 research papers in the year 2013, 35 research
papers in the year 2015, 33 research papers in the year 2019, 27 research papers each in
the years 2010 and 2011, 24 research papers in the year 2012, and 13 research papers
up to April 2020 (Figure 3).

v) Analysis based on contribution of authors—Number wise

Figure 4 depicts that a group of two authors has published 160 research papers,
whereas 155 research papers are published by a group of three authors, 67 research
papers by a single author, and 56 research papers by a group of four authors. Moreover,
only one paper has been authored by five authors.

20
vi) Analysis based on country-wise contribution of authors

Figure 5 depicts the authors from different countries who have actively
contributed to the research works on stock market liquidity. A total of 136 authors from
the United States have been the strongest contributors to the studies on stock market
liquidity. This is followed by 59 authors from the United Kingdom, 58 authors from
Australia, 56 authors from China, and 28 authors from Canada, respectively. Also,
there have been interesting contributions from countries like France (25 authors),
Germany (21 authors), Taiwan (17 authors), Hong Kong and New Zealand (14 authors
each), and the Netherlands, Korea, and India (13 authors each). It is also seen that quite
a few authors are emerging as contributors in this research area from countries like
Tunisia, Switzerland, Luxembourg, Pakistan, Belgium, Singapore, Israel, Czech
Republic, Nigeria, Indonesia, Hungary, Slovakia, Poland, Vietnam, Trinidad, Norway,
Austria, Finland, Portugal, Greece, Turkey, Lithuania, Ireland, Italy, Palestine,
Colombia, Romania, Spain, Thailand, South Africa, Russia, Saudi Arabia, Malaysia,
South Korea, Cyprus, Macau, Denmark, Japan, Chile, United Arab Emirates, Brazil,
Latvia, and Egypt.

21
vii) Analysis based on appearance of research papers in journals

By analyzing the selected research papers on stock market liquidity and the
different journals in which they were published, it was found that nearly 42 papers
were published in the Journal of Banking & Finance and 40 papers in the Journal of
Financial Markets. This was followed by 34 research papers in International Review of
Financial Analysis, 33 research papers in Pacific-Basin Finance Journal, 28 research
papers in Journal of Financial Economics, 23 research papers each in Journal of
International Financial Markets, Institutions & Money and Finance Research Letters,
and 20 research papers in Journal of Empirical Finance. The other research papers were
published in the journals, namely, Research on International Business and
Finance (17), International Review of Economics and Finance (15), Emerging Markets
Review (14), Journal of Corporate Finance (12), Economic Modelling (10), North
American Journal of Economics and Finance (10), and Physica A (10) (Figure 6).

4.2 OVERVIEW ON STOCK MARKET

Stock markets have been identified as locations for engaging in economic

transactions of buying and selling stocks or shares which are the ownership claims on
businesses. This represents an aggregation of buyers and sellers of stock and need not
be a physical location or a discrete entity. Stock markets are also known by different
names as share markets and equity markets. A stock exchange, also called a securities
exchange or bourse is the name given to the facility for engaging in buying and selling
of shares of stock or bonds or other financial instruments. For a security to be traded on
a stock exchange, it must be listed on a major stock exchange. In short, different stock
exchanges and the inter relationships among them constitute the system of stock
markets. Stock markets are without any doubt, an integral and indispensable part of a
country’s economy. But the impact of stock markets on the country’s economy can be
different from how the other countries’ stock markets affect their economies. All of
these factors are distinct for each country; therefore, the impact of stock markets on a
country’s economy is also distinct. Stock markets have also grown to be a global
phenomenon. Developed countries and developing countries around the world have
developed their stock markets with some of the most active stock markets existing in
countries like the US, the UK, Japan, India, China, Canada, Germany, France, South
Korea and the Netherlands. In this section the evolution of international stock markets
and the developments in Indian stock markets are briefly reviewed to help us
understand how stock markets have emerged as the driving economic forces that they
22
 are today.

 The beginning of stock trading

Even though the Italian cities developed the first ever trade in government securities,
they failed to contribute any more leaving the financial system largely undeveloped. At
the same time, the Dutch continuously engaged in pioneering financial innovations.
They realized that for the financial system to be developed and fully fledged, a serious
lack in the capital market has to be corrected. Finally the remedy came when the Dutch
East India Company in the early 1600s issued bonds and stocks to the public. A
prominent stock exchange which started off outside a coffee house in Amsterdam
in1602 is the Amsterdam stock exchange. It was also the first stock exchange to
officially engage in the trading of shares and stocks. The Dutch East India company
(VOC) founded in the year 1602 was the first company to be listed and the first to
release its shares for trading in the Amsterdam Stock Exchange. Therefore the
Amsterdam Stock Exchange (a.k.a. Beurs van Hendrick de Keyser in Dutch) became the
first stock exchange to trade in stocks when it floated the VOC’s freely transferable
securities for trading. The process of buying and selling stocks adopted by the
Amsterdam Stock Exchange to trade VOC’s shares became the basis for stock trading.
When this proved to be a success, businesses across England, France, Belgium and the
Netherlands began floating their securities. Shortly after this, in the 17th and 18th
centuries, new stock exchanges appeared in Belgium, Spain, Portugal and Sweden. Also
in France, England and the US in the later part of the 17th century. In the year 1693 the
first government bonds were traded in England to finance war expenditures under the
reign of King William III. Very soon, stock trading began as the joint stock companies
began going public. These stock brokers engaged in their business in the coffee houses
along Exchange Alley as they were prohibited from carrying out their activities in the
old commercial center, the Royal Exchange.

 Modern stock markets

During the 19th century, the United States and Europe continued to hold the
center stage as principal centers of stock trading with the London Stock Exchange
being the main stock market for Europe and the New York Stock Exchange for
America. A majority of the stock exchanges that were set up during this period
disappeared almost immediately while only a few thrived. Some of these exchanges
were set up during the California gold rush of 1849 to buy the shares of mining
companies and immediately disappeared with the gold rush. The second half of the
19th century saw the New York Stock Exchange single-handedly dominating the
financial system of the United States. They were characterized by only short periods of
trading activities or receiving information that could possibly affect trading activities
like developments in other countries or wars. The early 1990s saw a surge in stock
market trading with a majority of the general public investing in stocks by borrowing
money. This slowly resulted in a bubble with the market demands outpacing the value
23
of the business. At one point, this imbalance became too massive to be ignored that
many people pulled out their investments rapidly. This was the beginning of the1929
crash in the United States. Following the crash, the stock prices fell drastically in the
NYSE and other exchanges rendering investment in stock futile and endangering all
those who had their life savings invested in stocks. With the crash of 1929, millions of
families became debt ridden and incapable of fulfilling their financial responsibilities.

It is also credited to be the third largest stock market in North America in terms of
market capitalization. One reason for this high market cap being that it is the stock
exchange which hosts more oil and gas companies than any other stock exchange in the
world. TSX is the perfect example to show the dynamics of the stock markets of today.
Also there are stock markets in countries like the war-torn Iraq, whose stock exchange
is called the Iraq Stock Exchange. Although there are only a few public traded
companies enlisted under this exchange, it is large enough to be accessible to foreign
investors. It was also one of the few stock markets which were left unaffected by the
2008 economic crisis. These stock markets show us that there is no way we can simply
ignore the global importance of stock markets. Trillions of dollars are being traded on
the stock markets every day around the world, driving the capitalist world. In the
1970s, after three centuries of unchallenged dominance, the New York Stock Exchange
got its very challenger.

4.4 LITERATURE REVIEW ON STOCK MARKETS

A number of studies have established a positive relationship between economic
growth and stock market development. It has been supported by several empirical
studies such as those of Atje and Jovanovich (1993), Levine and Zervos (1993, 1998),
Rousseau and Wachtel (2000) and Beck and Levine (2004). Atje and Jovanovich
(1993) showed that stock markets have long run impacts on economic growth by
manipulating liquidity, risk diversifications, acquisition of information about firms,
24
corporate governance and savings mobilization. These studies suggest a strong positive
relationship between stock market development and growth rates of real GDP per
capita although they have failed to discuss the importance of stock market
development, banking sector development and economic growth in an integrated
framework. The works of Levine and Zervos (1995) and Demirguc- Kunt (1994) show
that stock markets and banking sector development can give a big boost to economic
development. Rousseau and Wachtel (2000), Beck and Levine (2004) were also of the
opinion that with a well -functioning financial sector or banking sector, stock markets
can give a big boost to economic development.

The ways in which stock market development can bring about economic growth
has been studied in a number of studies. A few of them have been elaborated here.
Greenwood and Jovanovic (1990) and King and Levine (1993) found that the provision
of timely and accurate information about the firms to the investors has increased the
investors’ risk adjusted returns considerably. This view was also supported by Kyle
(1984),Holmstrom and Tirole (1998), Stiglitz and Weiss (1981) as their studies also
found that market efficiency improves by delivering timely and accurate information to
the investor. In addition to this, the stock markets also allocate funds to the corporate
sector which has a real effect on economic growth. (Mirakhor and Lillanueva,
1990).North (1991) found that the stock market also lowers the cost of transferring the
ownership encouraging the investors to invest in equity markets and thereby increase
economic growth. According to the work of Bencivenga and Smith (1992) stock
markets can also bring about economic growth by decreasing liquidity assets holdings
and increasing the physical capital growth rate in the long run. Greenwood and Smith
(1997) found that the large stock markets lessen the cost of mobilizing savings.
Obstfeld (1994a; b) in his study found that international integrated stock markets
increase investor risks but this is compensated by the opportunities to investors to
diversify investment internationally. Mishkin (2001), Corporale et al., (2004) found
that stock markets facilitate economic growth by raising investment opportunities in
the country by recognizing and financing productive projects, allocating capital

25
efficiently, mobilizing domestic savings, diversifying risks and facilitating exchange of
goods and services. Paudel (2005) found that the liquidity of stock markets facilitate
firms to attain the much needed capital quickly thereby facilitating capital
accumulation, investment and growth.
According to Levine and Zervos (1996), stock market liquidity was found to be a
robust predictor of real per capita GDP growth after controlling for initial income,
initial investment in education, political stability, fiscal policy, openness to trade and
macroeconomic stability. They also found that the remaining stock market
development proxies do not show a robust link with long run growth. That is, market
size, international integration, capital accumulation, productivity, improvements, and
private savings rates and in particular, volatility were not found to be robustly linked
with growth in their framework. Their study showed that liquid equity markets were
the solution for the problem of long term investment blocking their savings for long
periods. This is because these markets provide such assets which can be sold easily and
inexpensively by the investor. Also in well-developed stock markets, liquidity risk is
low due to which investors do not hesitate to invest in long term promising projects. In
this case, the investors can sell their stocks at any time and with minimal effect on
actual investments. This enables the retention of capital within firms which will not get
prematurely removed to meet short term liquidity needs. Beck and Levine (2004) was
an improvement of the study of Levine and Zervos (1998) wherein the moving average
panel data of 40 countries over 5 years while controlling for many other growth
determinants, used the generalized method of moments technique to estimate the
problem.
CHAPTER 5: RESEARCH METHODOLOGY
5.1 STOCK EXCHANGE IN INDIA
An Introduction to the Indian Stock Market
Mark Twain once divided the world into two kinds of people: those who have seen the
famous Indian monument, the Taj Mahal, and those who haven't. The same could be
said about investors.
There are two kinds of investors: those who know about the investment opportunities
in India and those who don't. Although India's exchanges equate to less than 3% of the
total global market capitalization as of 2020, upon closer inspection, you will find the
same things you would expect from any promising market.12
Here we'll provide an overview of the Indian stock market and how interested investors
can gain exposure.

26
The BSE and NSE
Most of the trading in the Indian stock market takes place on its two stock exchanges:
the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE
has been in existence since 1875.3 The NSE, on the other hand, was founded in 1992
and started trading in 1994.4 However, both exchanges follow the same trading
mechanism, trading hours, and settlement process.
As of November 2021, the BSE had 5,565 listed firms, 5 whereas the rival NSE had
1,920 as of Mar. 31, 2021.6

Almost all the significant firms of India are listed on both the exchanges. The BSE is
the older stock market but the NSE is the largest stock market, in terms of volume.
Both exchanges compete for the order flow that leads to reduced costs, market
efficiency, and innovation. The presence of arbitrageurs keeps the prices on the two
stock exchanges within a very tight range.
National Stock Exchange of India Limited (NSE) is the leading stock exchange
of India, located in Mumbai, Maharashtra. It is world’s largest derivatives exchange in
2021 by number of contracts traded based on the statistics maintained by Futures
Industry Association (FIA), a derivatives trade body. NSE is ranked 4th in the world in
cash equities by number of trades as per the statistics maintained by the World
Federation of Exchanges (WFE) for the calendar year 2021. It is under the ownership
of some leading financial institutions, banks, and insurance companies. NSE was
established in 1992 as the first dematerialized electronic exchange in the country. NSE
was the first exchange in the country to provide a modern, fully automated screen-
based electronic trading system that offered easy trading facilities to investors spread
across the length and breadth of the country. Vikram Limaye is the Managing Director
27
and Chief Executive Officer of NSE.
National Stock Exchange has a total market capitalization of more than US$3.4
trillion, making it the world's 10th-largest stock exchange as of August 2021.[4] NSE's
flagship index, the NIFTY 50, a 50 stock index is used extensively by investors in
India and around the world as a barometer of the Indian capital market. The NIFTY 50
index was launched in 1996 by NSE. However, Vaidyanathan (2016) estimates that
only about 4% of the Indian economy / GDP is actually derived from the stock
exchanges in India.
Unlike countries like the United States where nearly 70% of the country's GDP is
derived from large companies in the corporate sector, the corporate sector in India
accounts for only 12–14% of the national GDP (as of October 2016). Of these only
7,400 companies are listed of which only 4000 trade on the stock exchanges at BSE
and NSE. Hence the stocks trading at the BSE and NSE account for only around 4% of
the Indian economy, which derives most of its income-related activity from the so-
called unorganized sector and household spending.
Economic Times estimates that as of April 2018, 6 crore (60 million) retail
investors had invested their savings in stocks in India, either through direct purchases
of equities or through mutual funds. Earlier, the Bimal Jalan Committee report
estimated that barely 1.3% of India's population invested in the stock market, as
compared to 27% in the United States and 10% in China.
History
National Stock Exchange was incorporated in the year 1992 to bring about
transparency in the Indian equity markets. Instead of trading memberships being
confined to a group of brokers, NSE ensured that anyone who was qualified,
experienced, and met the minimum financial requirements was allowed to trade. In this
context, NSE was ahead of its time when it separated ownership and management of
the exchange under SEBI's supervision. Stock price information that could earlier be
accessed only by a handful of people could now be seen by a client in a remote location
with the same ease. The paper-based settlement was replaced by electronic depository-
based accounts and settlement of trades was always done on time. One of the most
critical changes involved a robust risk management system that was set in place, to
ensure that settlement guarantees would protect investors against broker defaults.
i) NSE EMERGE
This article is about National Stock Exchange of India. For NSE EMERGE, see NSE
EMERGE.
NSE EMERGE is NSE's new initiative for Small and medium-sized enterprises (SME)
& Startup companies in India.[15] These companies can get listed on NSE without an
Initial public offering (IPO). This platform will help SME's & Startups connect with
investors and help them with the raising of funds.[16] In August 2019, the 200th
company listed on NSE's SME platform.
What Is the National Stock Exchange of India Limited (NSE)?
The National Stock Exchange of India Limited (NSE) is India's largest financial
28
 market. Incorporated in 1992, the NSE has developed into a sophisticated, electronic
market, which ranked fourth in the world by equity trading volume. Trading
commenced in 1994 with the launch of the wholesale debt market and a cash market
segment shortly thereafter.
Understanding the National Stock Exchange of India Limited (NSE)
Today, the National Stock Exchange of India Limited (NSE) conducts transactions in
the wholesale debt, equity, and derivative markets. One of the more popular offerings
is the NIFTY 50 Index, which tracks the largest assets in the Indian equity market. US
investors can access the index with exchange-traded funds (ETF), such as the iShares
India 50 ETF (INDY).
The National Stock Exchange of India Limited was the first exchange in India to
provide modern, fully automated electronic trading. It was set up by a group of Indian
financial institutions with the goal of bringing greater transparency to the Indian capital
market.

Special Considerations
As of June 2020, the National Stock Exchange had accumulated $2.27 trillion in
total market capitalization, making it one of the world's largest stock exchange. The
flagship index, the NIFTY 50, represents the majority of total market capitalization
listed on the exchange.
The total traded value of stocks listed on the index makes up almost half of the
traded value of all stocks on the NSE for the last six months. The index itself covers 12
sectors of the Indian economy across 50 stocks. Besides the NIFTY 50 Index, the
National Stock Exchange maintains market indices that track various market
capitalizations, volatility, specific sectors, and factor strategies.
The National Stock Exchange has been a pioneer in Indian financial markets,
being the first electronic limit order book to trade derivatives and ETFs. The exchange
supports more than 3,000 Very Small Aperture Terminal (VSAT) terminals, making
the NSE the largest private wide-area network in the country. Girish Chandra
Chaturvedi is the Chair of the Board of Directors and Vikram Limaye is the Managing
Director and CEO of the exchange.

Benefits of the NSE

The National Stock Exchange is a premier marketplace for companies preparing to list
on a major exchange. The sheer volume of trading activity and application of
automated systems promotes greater transparency in trade matching and the settlement
process.
This in itself can boost visibility in the market and lift investor confidence. Using
cutting-edge technology also allows orders to be filled more efficiently, resulting in
greater liquidity and accurate prices.

 Markets

29
 NSE offers trading and investment in the following segments
Equity
 Equity
 Indices
 Mutual fund
 Exchange-traded funds
 Initial public offerings
 Security Lending and Borrowing etc.
Derivatives
 Equity Derivatives (including Global Indices like S&P 500, Dow Jones and FTSE)
 Currency derivatives
 Commodity Derivatives
 Interest rate futures
Debt
Corporate bonds
 Equity Derivatives
The National Stock Exchange of India Limited (NSE) commenced trading in
derivatives with the launch of index futures on 12 June 2000. The futures and options
segment of NSE has made a global mark. In the Futures and Options segment, trading
in the NIFTY 50 Index, NIFTY IT index, NIFTY Bank Index, NIFTY Next 50 index,
and single stock futures are available. Trading in Mini Nifty Futures & Options and
Long term Options on NIFTY 50 are also available.[18] The average daily turnover in
the F&O Segment of the Exchange during the financial year April 2013 to March 2014
stood at ₹1.52236 trillion (US$20 billion).
On 29 August 2011, National Stock Exchange launched derivative contracts on the
world's most-followed equity indices, the S&P 500 and the Dow Jones Industrial
Average. NSE is the first Indian exchange to launch global indices. This is also the first
time in the world that futures contracts on the S&P 500 index were introduced and
listed on an exchange outside of their home country, the USA. The new contracts
include futures on both the DJIA and the S&P 500 and options on the S&P 500

 Interest Rate Futures

In December 2013, exchanges in India received approval from market regulator SEBI
for launching interest rate futures (IRFs) on a single GOI bond or a basket of bonds
that will be cash-settled. Market participants have been in favor of the product being
cash-settled and being available on a single bond. NSE will launch the NSE Bond
Futures on 21 January on highly liquid 7.16 percent and 8.83 percent 10-year GOI
bonds. Interest Rate Futures were introduced in India by NSE on 31 August 2009,
exactly one year after the launch of Currency Futures. NSE became the first stock
exchange to get approval for interest-rate futures, as recommended by the SEBI-RBI
committee.
30
  Debt Market
On 13 May 2013, NSE launched India's first dedicated debt platform to provide a
liquid and transparent trading platform for debt-related products.[22]

The Debt segment provides an opportunity for retail investors to invest in corporate
bonds on a liquid and transparent exchange platform. It also helps institutions that are
holders of corporate bonds. It is an ideal platform to buy and sell at optimum prices and
help Corporates to get adequate demand when they are issuing the bonds.
 Trading schedule
Trading on the equities segment takes place on all days of the week (except Saturdays
and Sundays and holidays declared by the Exchange in advance). The market timings
of the equities segment are:

(1) Pre-open session:

Order entry & modification Open: 09:00 hrs
Order entry & modification Close: 09:08 hrs*
*with random closure in last one minute. Pre-open order matching starts immediately
after the close of pre-open order entry.

(2) Regular trading session

Normal/Retail Debt/Limited Physical Market Open: 09.15 hrs
Normal/Retail Debt/Limited Physical Market Close: 15:30 hrs.
Aftermarket hours: 16:00 – 09:00 hrs
Exchange Traded Funds and Derivatives on National Stock Exchange[edit]

The following products are trading on the NIFTY 50 Index in the Indian and
international Market:

 7 Asset Management Companies have launched exchange-traded funds on

NIFTY 50 Index which is listed on NSE
 15 index funds have been launched on NIFTY 50 Index
 Unit-linked products have been launched on the NIFTY 50 Index by several
insurance companies in India
 World Indices
 Derivatives Trading on NIFTY 50 Index:

31
Futures and Options trading on NIFTY 50 Index
Trading in NIFTY 50 Index Futures on Singapore Stock Exchange(SGX)
Trading in NIFTY 50 Index Futures on Chicago Mercantile Exchange(CME)

 Technology
NSE's trading systems are a state-of-the-art application. It has an uptime record of
99.99% and processes more than a billion messages every day with a sub-millisecond
response time.

NSE has taken huge strides in technology in 20 years. In 1994, when trading
started, NSE technology was handling 2 orders a second. This increased to 60 orders a
second in 2001. Today NSE can handle 1,60,000 orders/messages per second, with
infinite ability to scale up at short notice on demand, NSE has continuously worked
towards ensuring that the settlement cycle comes down. Settlements have always been
handled smoothly. The settlement cycle has been reduced from T+3 to T+2/T+1.

 Financial literacy
NSE has collaborated with several universities like Gokhale Institute of Politics &
Economics (GIPE), Pune, Bharati Vidyapeeth Deemed University (BVDU), Pune,
Guru Gobind Singh Indraprastha University, Delhi, the Ravenshaw University of
Cuttack and Punjabi University, Patiala, among others to offer MBA and BBA courses.
NSE has also provided mock market simulation software called NSE Learn to Trade
(NLT) to develop investment, trading, and portfolio management skills among the
students.[24] The simulation software is very similar to the software currently being
used by the market professionals and helps students to learn how to trade in the
markets.

NSE also conducts online examinations and awards certification, under its
Certification in Financial Markets (NCFM) programs.[25] At present, certifications are
available in 46 modules, covering different sectors of financial and capital markets,
both at the beginner and advanced levels. The list of various modules can be found at
the official site of NSE India. In addition, since August 2009, it has offered a short-
term course called NSE Certified Capital Market Professional (NCCMP).[26] The
NCCMP or NSE Certified Capital Market Professional is a 100-hour program for over
3–4 months, conducted at the colleges, and covers theoretical and practical training in
subjects related to the capital markets. NCCMP covers subjects like equity markets,
debt markets, derivatives, macroeconomics, technical analysis, and fundamental
analysis. Successful candidates are awarded joint certification from NSE and the
concerned.

32
NSE co-location case
On 8 July 2015, Sucheta Dalal wrote an article on Moneylife alleging that some NSE
employees were leaking sensitive data related to high-frequency trading or co-location
servers to a select set of market participants so that they could trade faster than their
competitors. NSE alleged defamation in the article by Moneylife. On 22 July 2015,
NSE filed a ₹1 billion (US$13 million) suit against the publication.[27] However, on 9
September 2015, the Bombay High Court dismissed the case and fined NSE ₹5 million
(US$66,000) in this defamation case against Moneylife.[28] The High Court asked
NSE to pay ₹150,000 (US$2,000) to each journalist Debashis Basu and Sucheta Dalal
and the remaining ₹4.7 million (US$62,000) to two hospitals.
The Bombay High Court has stayed the order on costs for a period of two weeks,
pending the hearing of the appeal filed by NSE.
In May 2019 SEBI has debarred NSE from accessing the markets for a period of 6
months. While NSE confirmed this will not impact their functioning, they won't be
able to list their IPO or introduce any new trading products for that period.
Additionally, the watchdog also ordered NSE to disgorge Rs 624.9 crores (along with
accrued interest for the period), an amount equivalent to the profits it made from the
unfair trade practice of co-location servers they provided during the period from 2010–
11 to 2013–14.

 Trading Mechanism
Trading at both the exchanges takes place through an open electronic limit order book
in which order matching is done by the trading computer.7 There are no market makers
and the entire process is order-driven, which means that market orders placed by
investors are automatically matched with the best limit orders. As a result, buyers and
sellers remain anonymous.
The advantage of an order-driven market is that it brings more transparency by
displaying all buy and sell orders in the trading system. However, in the absence of
33
market makers, there is no guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many of which
provide an online trading facility to retail customers. Institutional investors can also
take advantage of the direct market access (DMA) option in which they use trading
terminals provided by brokers for placing orders directly into the stock market trading
system.

 Settlement and Trading Hours

Equity spot markets follow a T+2 rolling settlement.89 This means that any trade
taking place on Monday gets settled by Wednesday. All trading on stock exchanges
takes place between 9:55 a.m. and 3:30 p.m., Indian Standard Time (+ 5.5 hours
GMT), Monday through Friday. Delivery of shares must be made in dematerialized
form, and each exchange has its own clearing house, which assumes all settlement risk
by serving as a central counterparty.

 Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest
market index for equities; it includes shares of 30 firms listed on the BSE.10 It was
created in 1986 and provides time series data from April 1979, onward.
Another index is the Standard and Poor's CNX Nifty; it includes 50 shares listed on the
NSE.11 It was created in 1996 and provides time series data from July 1990, onward.

 Market Regulation
The overall responsibility of development, regulation, and supervision of the stock
market rests with the Securities and Exchange Board of India (SEBI), which was
formed in 1992 as an independent authority. Since then, SEBI has consistently tried to
lay down market rules in line with the best market practices. It enjoys vast powers of
imposing penalties on market participants, in case of a breach.
 Who Can Invest in India?
India started permitting outside investments only in the 1990s. Foreign investments are
classified into two categories: foreign direct investment (FDI) and foreign portfolio
investment (FPI). All investments in which an investor takes part in the day-to-day
management and operations of the company are treated as FDI, whereas investments in
shares without any control over management and operations are treated as FPI.
For making portfolio investments in India, one should be registered either as a foreign
institutional investor (FII) or as one of the sub-accounts of one of the registered FIIs.
Both registrations are granted by the market regulator, SEBI.
Foreign institutional investors mainly consist of mutual funds, pension funds,
endowments, sovereign wealth funds, insurance companies, banks, and asset
management companies. At present, India does not allow foreign individuals to invest
directly in its stock market. However, high-net-worth individuals (those with a net
34
worth of at least $50 million) can be registered as sub-accounts of an FII.
Foreign institutional investors and their sub-accounts can invest directly into any of the
stocks listed on any of the stock exchanges. Most portfolio investments consist of
investment in securities in the primary and secondary markets, including shares,
debentures, and warrants of companies listed or to be listed on a recognized stock
exchange in India.
FIIs can also invest in unlisted securities outside stock exchanges, subject to the
approval of the price by the Reserve Bank of India. Finally, they can invest in units of
mutual funds and derivatives traded on any stock exchange.
An FII registered as a debt-only FII can invest 100% of its investment into debt
instruments. Other FIIs must invest a minimum of 70% of their investments in equity.
The balance of 30% can be invested in debt. FIIs must use special non-resident rupee
bank accounts in order to move money in and out of India. The balances held in such
an account can be fully repatriated.

 Restrictions and Investment Ceilings

The government of India prescribes the FDI limit, and different ceilings have been
prescribed for different sectors. Over a period of time, the government has been
progressively increasing the ceilings. FDI ceilings mostly fall in the range of 26% to
100%.
By default, the maximum limit for portfolio investment in a particular listed firm is
decided by the FDI limit prescribed for the sector to which the firm belongs. However,
there are two additional restrictions on portfolio investment. First, the aggregate limit
of investment by all FIIs, inclusive of their sub-accounts in any particular firm, has
been fixed at 24% of the paid-up capital. However, the same can be raised up to the
sector cap, with the approval of the company's boards and shareholders.
Secondly, investment by any single FII in any particular firm should not exceed 10% of
the paid-up capital of the company. Regulations permit a separate 10% ceiling on
investment for each of the sub-accounts of an FII, in any particular firm. However, in
the case of foreign corporations or individuals investing as a sub-account, the same
ceiling is only 5%. Regulations also impose limits for investment in equity-based
derivatives trading on stock exchanges.

 Investments for Foreign Entities

Foreign entities and individuals can gain exposure to Indian stocks through institutional
investors. Many India-focused mutual funds are becoming popular among retail
investors. Investments could also be made through some of the offshore instruments,
like participatory notes (PNs), depositary receipts, such as American depositary
receipts (ADRs) and global depositary receipts (GDRs), exchange traded funds (ETFs),
and exchange traded notes (ETNs).
As per Indian regulations, participatory notes representing underlying Indian stocks can
35
be issued offshore by FIIs, only to regulated entities. However, even small investors
can invest in American depositary receipts representing the underlying stocks of some
of the well-known Indian firms, listed on the New York Stock Exchange and Nasdaq.
ADRs are denominated in dollars and subject to the regulations of the U.S. Securities
and Exchange Commission (SEC). Likewise, global depositary receipts are listed on
European stock exchanges. However, many promising Indian firms are not yet using
ADRs or GDRs to access offshore investors.
Retail investors also have the option of investing in ETFs and ETNs, based on Indian
stocks. India-focused ETFs mostly make investments in indexes made up of Indian
stocks. Most of the stocks included in the index are the ones already listed on the
NYSE and Nasdaq.
As of 2020, two of the most prominent ETFs based on Indian stocks are the iShares
MSCI India ETF (INDA) and the Wisdom-Tree India Earnings Fund (EPI). The most
prominent ETN is the iPath MSCI India Index Exchange Traded Note (INPTF). Both
ETFs and ETNs provide a good investment opportunity for outside investors.

 The Bottom Line

Emerging markets like India are fast becoming engines for future growth. Currently,
only a very low percentage of the household savings of Indians are invested in the
domestic stock market, but with gross domestic product (GDP) growing at 7% to 8%
annually for the last few years, though in the 6% range for 2018 and 2019, and a stable
financial market, we might see more money joining the race. Maybe it's the right time
for outside investors to seriously think about joining the India bandwagon.

5.2 Role of Stock Exchanges in Capital Market of India

Capital Markets are one of the most sought-after platforms for stepping into the world
of trading and investments. Everyday millions of investors and traders trade in these
markets. All the trades in the markets are processed through an entity known as stock
exchange.
There are many stock exchanges in India which carry out millions and billions of
trades every day. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE)

36
are the two most prominent and largest exchanges in India. BSE is also the oldest stock
exchange in India and dates its origin to late 1800s. There are various regional
exchanges in India as well.
Stock exchanges play a prominent role in the consolidation of the national economy
and also help in the development of industrial sector especially. India is a developing
economy, and in such countries, these exchanges play a cardinal role. They help in
mobilizing the savings and ensure safety at the same time. These mobilization helps in
promoting the level of capital formation.

1. Mobilization of Savings?
Capital Markets are one of the most sought-after platforms for institutional investors as
well as individuals. To ensure investor’s protection, all the trading transactions in the
capital markets are regulated with proper regulations and rules. This also helps in
consolidating the confidence of small savers and individual investors. In this way,
stock exchanges help in attracting savings from large number of investors in the capital
markets.
2. Promoting Capital Formation
The mobilization of funds from the savers by the capital markets is channelized to
various industries which are involved in production and manufacturing of various
goods and services which is beneficial for the economy. This enhances the capital
formation and development of the national assets. This channelization of savings into
appropriate avenues of investment is one of the primary roles of the stock exchanges.

3. Liquidity of Investment
As an investor, it is very important to consider the liquidity of your investment. This
liquidity is provided by the stock exchanges. Investors can liquidate their securities and
other capital market assets anytime during the trade hours and days. Therefore, stock
exchanges help in ensuring liquidity of investment. The online trading carried out on
the stock exchanges after dematerialization of securities has transformed the trading
37
experience. It helps investors in buying, selling and transferring their investment
seamlessly.
4. Investment Safety
One of the most important role of stock exchange in ensuring investment safety to the
investors. After the dematerialization act, trading on stock exchanges has been
completely online. The Securities and Exchange Board of India (SEBI) keeps an eye
on the functioning of exchanges and keeps on identifying new loopholes in the system.
Several measures are enforced at times to overcome the same and ensure investment
safety. The authorities at exchanges try their best to curb speculative practices and
minimize the risk for investors to safeguard their confidence.
5. Wide Marketability to Securities
In the earlier days, trading on stock exchanges was done using physical security
certificates. The trading was limited to the office of the stock exchange and all dealings
were carried out over there only. Investors from distant parts of the country remain in
the dark about the price movements on exchanges. After the establishment of online
trading system, investors can keep an eye on the price movements and make the most
out of all the price movements in the capital markets. The modern stock exchanges
backed by information technology have provided wide marketability to the securities.
6. Funds for Development Purpose
As we have already discussed, stock exchanges help in mobilization and channelizing
of funds from savers to various industries. Many times, these industries are the one
which are involved in government development projects including infra companies,
railways, telecommunications etc. Stock exchanges help in constant evaluation of
government securities.

7. Barometer of National Economy

The stock exchanges are considered to be the barometer of a nation’s economy. The
economy of a country is economically symbolized by the most significant stock
exchange of that particular country. These stock exchanges help in representing the
progress and situation of a nation’s economy at national and international levels. For
instance, Bombay Stock Exchange or BSE is often considered by overseas investors to
have an idea about the economic condition of our country.

5.3 Bombay Stock Exchange

The Bombay Stock Exchange is one of the oldest stock exchanges in Asia. It was
established as "The Native Share & Stock Brokers Association" in 1875. It is the first
stock exchange in the country to obtain permanent recognition in 1956 from the
Government of India under the Securities Contracts (Regulation) Act, 1956. The
38
Exchange's pivotal and pre-eminent role in the development of the Indian capital
market is widely recognized and its index, SENSEX, is tracked worldwide

SENSEX

The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that
subsequently became the barometer of the Indian stock market. SENSEX is not only
scientifically designed but also based on globally accepted construction and review
methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies. The base year of
SENSEX is 1978-79 and the base value is 100. The index is widely reported in both
domestic and international markets through print as well as electronic media. Due to is
wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of
the Indian stock market. As the oldest index in the country, it provides the time series
data over a fairly long period of time. Small wonder, the SENSEX has over the years
become one of the most prominent brands in the country. The SENSEX captured all
these events in the most judicial manner. One can identify the booms and busts of the
Indian stock market through SENSEX. The launch of SENSEX in 1986 was later
followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 =
100). It comprised of 100 stocks listed at five major stock exchanges. The values of all
BSE indices are updated every 15 seconds during the market hours and displayed
through the BOLT system, BSE website and news wire agencies. All BSE-indices are
reviewed periodically by the “index committee” of the exchange.

Overview Of The Regulatory Framework Of The Capital Market In

India India has a financial system that is regulated by independent regulators in the
sectors of banking, insurance, capital markets and various service sectors. The Indian
Financial system is regulated by two governing agencies under the Ministry of Finance.

39
 They are 1 Reserve Bank of India The RBI was set up in 1935 and is the central bank
of India. It regulates the financial and banking system. It formulates monetary policies
and prescribes exchange control norms.
2 The Securities Exchange Board of India
The Government of India constituted SEBI on April 12, 1988, as a non-statutory body to
promote orderly and healthy development of the securities market and to provide investor
protection. Department Economic Affairs The capital markets division of the Department of
Economic Affairs regulates capital markets and securities transactions. The capital markets
division has been entrusted with the responsibility of assisting the Government in framing
suitable policies for the orderly growth and development of the securities markets with the
SEBI, RBI and other agencies. It is also responsible for the functioning of the Unit Trust of
India (UTI) and Securities and Exchange Board of India (SEBI). The principal aspects that
are dealt with the capital market division are:
 Policy matters relating to the securities market
 Policy matters relating to the regulation and development and investor protection of
the securities market and the debt market.
 Organizational and operational matters relating to SEBI

The Capital Market is governed by:

 Securities Contract (Regulation) Act, 1956
 Securities Contract (Regulation) Rules, 1957
 SEBI Act, 1992  Companies Act 1956
 SEBI (Stock Brokers and Sub Brokers) Rules, 1992  Exchange Bye-Laws Rules &
Regulations

Self-regulating Role of the Exchange The exchange functions as a Self Regulatory

Organization with the parameters laid down by the SCRA, SEBI Act, SEBI
Guidelines and Rules, Bye-laws and Regulations of the Exchange. The Governing
Board discharges these functions. The Executive Director has all the powers of the
governing board except discharging a member indefinitely or declaring him a
defaulter or expelling him. The Executive Director takes decisions in the areas like
surveillance, inspection, investigation, etc. in an objective manner as per the
parameters laid down by the governing board or the statutory committees like the
Disciplinary Action Committee. Trading With Stock Market This section will
introduce us about the process and instruments used to help a customer or a client to
trade with arcadia securities. This process is almost similar to any other trading firm
but there will be some difference in the cost of brokerage commission.
Trading: It is a process by which a customer is given facility to buy and sell share
this buying and selling can only be done through some broker and this is where
Arcadia helps its customer. A customer willing to trade with any brokerage house
need to have a demat account, trading account and saving account with a brokerage
firm. Any one having following document can open all the above mentioned account
and can start trading.
40
 Document Required
 photographs ( signed across)
 Photo Identification Proof - any of the following - Voter ID/Driving
License/Passport.
 Address Proof any of the following - Voter ID/Driving License/ Passport/ Bank
statement or pass book sealed and attestation by bank official/ BSNL landline bill.
 A crossed Cheque favouring “Karvy Stock Broking”. Of the required amount. The
amount for Demat as well as trading will be Rs. 900/-(free Demat +900 Trading
Account) the minimum amount being Rs. 900 a cheque can be given for a larger
amount.
 Copy of PAN Card is mandatory.
 Registration Kit  CDSL Demat Kit
 Bank and address proof declaration.
 PAN name discrepancy form.

These documents may not be consumer friendly but it is to avoid illegal transaction and
to prevent black money this ensures that money invested is accounted.

Techniques and Instruments for Trading

The various techniques that are available in the hands of a client are:-
1. Delivery
2. Intraday
3. Future
4. Forwards
5. Options
6. Swaps

Basic Requirement for doing Trading

Trading requires Opening a Demat account. Demat refers to a dematerialized account.
You need to open a Demat account if you want to buy or sell stocks. So it is just like a
bank account where actual money is replaced by shares. We need to approach the
Depository Participants (DP, they are like bank branches), to open Demat account.
A depository is a place where the stocks of investors are held in electronic form. The
depository has agents who are called depository participants (DPs). Think of it like a
bank. The head office where all the technology rests and details of all accounts held is
like the depository. And the DPs are the branches that cater to individuals. There are
only two depositories in India –

 The National Securities Depository Ltd (NSDL) and the

 Central Depository Services Ltd (CDSL)

41
 Capital Market Participants
 Banks
 Exchanges
 Clearing Corporations
 Brokers
 Custodians
 Depositories
 Investors
 Merchant Bankers
Types of Investors
 Institutional Investors- MFs / FI / FIIs / Banks
 Retail Investors
 Arbitrageurs / Speculators
 Hedgers
 Day traders/Jobbers
Combination of Futures and Option Hedging means, minimizing the risk, i.e.,
minimizing the losses. Under index futures and index options investor can minimize
his losses. Hedging does not remove losses but removes unwanted exposure, i.e.
unnecessary risk. One should not enter into a hedging strategy hoping to make excess
profits; all it can do is reduce the risk. 55 Parameters Of Investment The nature of
investment differs from individual to individual and is unique to each one because it
depends on various parameters like future financial goals, the present & the future
income.

INVESTMENT

The word "investment" can be defined in many ways according to different theories and
principles. It is a term that can be used in a number of contexts. However, the different meanings
of "investment" are more alike than dissimilar. Generally, investment is the application of
money for earning more money. Investment also means savings or savings made through
delayed consumption. According to economics, investment is the utilization of resources in
order to increase income or production output in the future. An amount deposited into a bank or
machinery that is purchased in anticipation of earning income in the long run are both examples
of investments. Although there is a general broad definition to the term investment, it carries
slightly different meanings to different industrial sectors. According to economists, investment
refers to any physical or tangible asset, for example, a building or machinery and equipment.
On the other hand, finance professionals define an investment as money utilized for
buying financial assets, for example stocks, bonds, bullion, real properties, and precious
items. According to finance, the practice of investment refers to the buying of a financial
product or any valued item with anticipation that positive returns will be received in the
future. The most important feature of financial investments is that they carry high
market liquidity. The method used for evaluating the value of a financial investment is

42
known as valuation. According to business theories, investment is that activity in which
a manufacturer buys a physical asset, for example, stock or production equipment, in
expectation that this will help the business to prosper in the long run. Characteristics of
an investment decision:
1. It involves the commitment of funds available with you or that you would be getting
in the future.
2. The investment leads to acquisition of a plot, house, or shares and debentures.
3. The physical or financial assets you have acquired are expected to give certain
benefits in the future periods.
The benefits may be in the form of regular revenue over a period of time like interest or
dividend or sales or appreciation after some point of time as normally happens in the
case of investment in land or precious metals. Essentials of Investment Essentials of
investment refer to why investment, or the need for investment, is required. The
investment strategy is a plan, which is created to guide an investor to choose the most
appropriate investment portfolio that will help him achieve his financial goals within a
particular period of time. An investment strategy usually involves a set of methods,
rules, and regulations, and is designed according to the exchange or compromise of the
investor's risks and returns. A number of investors like to increase their earnings through
high-risk investments, whilst others prefer investing in assets with minimum risk
involved. However, the majority of investors choose an investment strategy that lies in
the middle. Investment strategies can be broadly categorized into the following types:
 Active strategies: One of the principal active strategies is market timing (an
investor
is able to move into the market when it is on the low and sell the stocks when the
market is on the high), which is applied for maximizing yields.
 Passive strategies: Frequently implemented for reducing transaction costs.
 Investments confer proportionate ownership
The approach to valuing a company is similar to making an investment in a business.
Therefore, there is a need to have a comprehensive understanding of how the business
operates.
 Maintain a margin of safety
The benchmark for determining relative attractiveness of stocks would be the intrinsic
value of the business. The Investment Manager would endeavor to purchase stocks that
represent a discount to this value, in an effort to preserve capital and generate superior
growth.

 Disciplined approach to selling

The decision to sell a holding would be based on either the anticipated price appreciation being
achieved or being no longer possible due to a change in fundamental factors affecting the
company or the market in which it competes, or due to the availability of an alternative that, in
the view of the Investment Manager, offers superior returns. In order to implement the
43
investment approach effectively, it would be important to periodically meet the management
face to face. This would provide an understanding of their broad vision and commitment to the
long-term business objectives.

CHAPTER 6 : DATA COLLECTION AND ANALYSIS

44
The first stock market in the world was the London Stock Exchange . It was started in
a coffeehouse, where traders used to meet to exchange shares, in 1773.

The first stock exchange in the United States was started in Philadelphia in
1790. The Buttonwood Agreement, so named because it was signed under a
buttonwood tree, marked the beginnings of New York’s Wall Street in 1792. The
agreement was signed by 24 traders and was the first American organization of its
kind to trade in securities. The traders renamed their venture as the New York Stock
and Exchange Board in 1817.

i)

Analysis & Interpretation:

From the survey it was found that 90% respondents invest in the stock
market and 10% who were non-investors,

ii)

45
 Analysis & Interpretation Above pie-chart shows that 45% investors
were aware of the mutual fund, 25% investors were aware of shares, 15%
investors were aware of debentures, 10% investors were bonds. It means
majority of persons aware about mutual fund whereas shares and
debentures were of second importance.

iii)

46
47
Analysis & Interpretation:

From the survey it was found that 30% respondents invest in Mutual funds, 25% invest
in Shares and 20% invest in Debentures. Thus, it can be stated that maximum people
invest in Mutual Funds whereas shares are having 2nd importance.

iv)

48
 Analysis & Interpretation:
From the survey it was found that 90% respondents wants their investment grow at fast
rate whereas only 10% respondents were in the favour of investment growth at average
rate.

V)

49
Analysis & Interpretation:
From the above table & chart it was found that 45 respondents invest monthly, 35
invest yearly and there were 20 respondents who invest daily. Thus, it can be stated
that majority of the investors invest monthly in stock market

vi)

50
Analysis & Interpretation:
From the above table & chart, it was found that 40 respondents invest 15-20% of their
annual income, 24 respondents invest more than 20% of their annual income, 22
respondents invest up to 10-15% of their income and 14 respondents invest up to 10%
of their income in different investment avenues. Thus, it can be concluded that majority
of investors invest 10% to 20% of their monthly income.

51
Domestic Market Capitalization (USD millions)

Market
Exchange Location
Cap.*
NYSE U.S. 22,987,587
Nasdaq U.S. 13,286,825
Japan Exchange Group Japan 6,000,171
Shanghai Stock Exchange China 5,037,349
Euronext France 4,821,103
Hong Kong Exchanges and Clearing Hong Kong 4,595,366
LSE Group U.K. 4,024,164
Shenzhen Stock Exchange China 3,454,965
TMX Group Canada 2,386,066
Saudi
Saudi Stock Exchange (Tadawul) 2,333,838
Arabia
BSE India Limited India 2,181,351
National Stock Exchange of India
India 2,162,693
Limited
Deutsche Boerse AG Germany 2,020,041
SIX Swiss Exchange Switzerland 1,775,268
Nasdaq Nordic and Baltics Sweden 1,594,481
Australian Securities Exchange Australia 1,497,599
Korea Exchange South Korea 1,402,716
Taiwan Stock Exchange Taiwan 1,143,210
B3 - Brasil Bolsa Balcão Brazil 1,118,281
Moscow Exchange Moscow 772,189

* as of January 2020

52
CHAPTER 7 : LIMITATIONS

Limitations on Stock Exchanges: An In-Depth Analysis

Introduction
Stock exchanges are vital components of the global financial system, providing
platforms where securities such as stocks, bonds, and derivatives are traded. They play
a crucial role in facilitating capital formation, providing liquidity, and enabling price
discovery. However, to ensure that these markets function efficiently and fairly, a
range of limitations and regulations are imposed. These limitations aim to prevent
market manipulation, protect investors, and maintain overall market stability. This
analysis delves into various limitations on stock exchanges, exploring their rationale,
implementation, and impact.

i) Trading Hours and Market Access

a) Trading Hours

Stock exchanges operate within specific trading hours, which can vary by exchange
and region. For example, the New York Stock Exchange (NYSE) and NASDAQ
operate from 9:30 AM to 4:00 PM EST, Monday through Friday. These hours are set
to provide a structured timeframe for trading activities, which helps in managing
market volatility and ensuring that trading is orderly.

b) Pre-Market and After-Hours Trading

In addition to regular trading hours, many exchanges offer pre-market and after-hours
trading sessions. These extended hours allow investors to trade outside of the regular
session, although liquidity can be lower and price volatility can be higher during these
times. Limitations on these sessions often include narrower price spreads and less
trading volume, which can impact the execution of trades.

ii) Circuit Breakers

a) Purpose and Mechanism
Circuit breakers are designed to prevent excessive market volatility and maintain
market integrity. They trigger temporary trading halts when major stock indices fall by
a specified percentage within a certain timeframe. For instance, in the U.S., if the S&P
500 index drops by 7% (Level 1) or 13% (Level 2) during a single trading day, trading
may be halted for 15 minutes. A 20% drop (Level 3) triggers a halt for the remainder of
the day. These mechanisms help to prevent panic selling and allow investors to make
more informed decisions.

b) Global Practices
Different exchanges around the world have their own circuit breaker rules. For
example, the European markets have mechanisms similar to those in the U.S., but the
53
thresholds and procedures may differ. In Asia, stock exchanges such as those in Hong
Kong and Japan also have their own set of circuit breaker regulations to manage
extreme volatility.

iii) Position Limits

a) Purpose of Position Limits

Position limits restrict the maximum number of shares or contracts that a single trader
or entity can hold in a particular security or commodity. These limits are designed to
prevent market manipulation, excessive speculation, and undue influence by large
players. By capping the size of positions, exchanges aim to promote a more equitable
and stable market environment.

b) Implementation and Examples

Exchanges implement position limits in various ways. For example, the Commodity
Futures Trading Commission (CFTC) in the U.S. sets position limits for futures and
options contracts to avoid market manipulation and excessive speculation. Similarly,
stock exchanges may impose limits on the number of shares that can be owned by a
single entity to prevent market distortions.

iv) Short Selling Restrictions

a) Short Selling and Its Risks

Short selling involves borrowing shares to sell them with the expectation that their
price will decline, allowing the shares to be bought back at a lower price for a profit.
While short selling can contribute to market liquidity and price discovery, it also
carries risks, particularly during periods of market stress.

b) Regulatory Restrictions

To mitigate these risks, exchanges and regulators impose restrictions on short selling.
For instance, during periods of high volatility or market downturns, regulators may
impose bans or restrictions on short selling certain stocks to prevent excessive
downward pressure on prices. Additionally, some exchanges require that short sellers
locate and borrow the shares before selling them, which helps to prevent "naked" short
selling.

c) Regulatory Oversight
Regulatory bodies, such as the Federal Reserve in the U.S., set margin requirements to
ensure that investors do not take on excessive leverage. These requirements help to
stabilize the market by limiting the amount of credit that can be extended to investors
and reducing the risk of market disruptions due to margin calls.
54
v) Minimum Share Prices
a) Listing Standards

Exchanges often have minimum share price requirements to ensure that listed
companies maintain a certain level of market value and liquidity. For example,
NASDAQ has a minimum bid price requirement for its listed stocks.

b) Consequences of Non-Compliance

Companies that fall below the minimum share price threshold may face delisting or
other penalties. This requirement helps to ensure that only companies with adequate
market capitalization and liquidity remain listed, thereby protecting investors and
maintaining market stability.

vi) Regulatory Oversight

a) Role of Regulatory Bodies

Stock exchanges operate under the oversight of regulatory bodies that enforce
compliance with market rules and regulations. In the U.S., the SEC is the primary
regulatory authority, while other countries have their own regulatory agencies.

b) Impact on Market Integrity

Regulatory oversight ensures that exchanges operate fairly and transparently. It helps
to prevent fraud, market manipulation, and other unethical practices. Regulatory bodies
also have the authority to impose penalties and sanctions on market participants who
violate rules.

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CHAPTER 7: OBSERVATION AND CONCLUSION

Indian Stock Markets is one of the oldest in Asia. Its history dates back to nearly
200 years ago. The earliest records of security dealings in India are meager and
obscure. The East India Company was the dominant institution in those days and
business in its loan securities used to be transacted towards the close of the eighteenth
century. The nature of investment differs from individual to individual and is unique to
each one because it depends on various parameters like future financial goals, the
present & the future income model, capacity to bear the risk, the present requirements
and lot more. As an investor progresses on his/her life stage and as his/her financial
goals change, so does the unique investor profile. Maximum investors are aware of all
the investment options. Investors do not invest in a single avenue. They prefer different
avenues and maximum investors prefer to invest in shares, mutual funds & debentures.
The investment decision of investors is influenced by their own decision and through
friends & relatives. Majority of investors invest 15-20% of their annual income. The
most important factor is Return which influenced the decision regarding investment.
The NSE review (2012) records that the Indian equity market has a nationwide
trading network with over 4827 corporate brokers and about 10,165 traders registered
with the SEBI. The stock markets have become an integral component of our economy.
These stock markets aren’t going to be replaced anytime soon and they are meant to
stay for years to come. They will continue to remain the major driving force of the
economy in many countries. But there are a few things the analysts anticipate. NYSE
still remains the largest and inarguably the most powerful stock exchange in the world
and its market capitalization is larger than that of Tokyo, London and NASDAQ. Also
in all probability, stock markets may merge with each other in the years to come. Some
analysts have even forecasted a single global stock market but this is highly unlikely in
the recent future. Irrespective of the changes in stock markets, stock markets will
continue to run the global economies for the long foreseeable future.
It can be easily seen empirical evidence in the context of Indian capital markets
is still inconclusive and remains ambiguous. The pace of economic reforms and rapid
integration with the world economy has significantly improved the importance of
capital markets in India. Over the years, the Indian capital market system has
undergone major fundamental institutional changes which resulted in reduction in
transaction costs, significant improvements in efficiency, transparency and safety. All
these changes have brought about the economic development of the economy through
stock markets. In the same way, economic expansion fuelled by technological changes,
products and services innovation is expected to create a high demand for stock market
development.
A stock exchange is an exchange where traders and stock brokers buy and sell
shares of stock, bonds and other securities. It also offers facilities for issue and
redemption of securities and other financial instruments. Stock issued by listed

56
 companies and unit trusts, bonds and pooled investment products can be traded on a
stock exchange. A stock exchange functions as a 'continuous auction' market where
transactions are conducted between the buyers and sellers.
A stock exchange plays an important role in the economy. It helps to raise capital
for business, mobilize savings for investment, facilitates the growth of companies, and
enables profit sharing. It assists in creating investment opportunities for small
investors, and raising capital for development projects taken up by the government. It
acts as a barometer of the economy.

 Stock means ownership. As an owner, you have a claim on the assets and earnings of a
company as well as voting rights with your shares.
 Stock is equity, bonds are debt. Bondholders are guaranteed a return on their investment
and have a higher claim than shareholders. This is generally why stocks are considered
riskier investments and require a higher rate of return.
 You can lose all of your investment with stocks. The flip-side of this is you can make a
lot of money if you invest in the right company.
 The two main types of stock are common and preferred. It is also possible for a
company to create different classes of stock.
 Stock markets are places where buyers and sellers of stock meet to trade. The NYSE and
the Nasdaq are the most important exchanges in the United States.
 Stock prices change according to supply and demand. There are many factors
influencing prices, the most important being earnings.
 There is no consensus as to why stock prices move the way they do.
 To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP).
 Stock tables/quotes actually aren't that hard to read once you know what everything
stands for!
 Bulls make money, Bears make money, but Pigs get slaughtered!

The stock market is like a big auction where anyone interested can buy and sell stocks,
or shares, which are small ownership slices of publicly traded companies.

Stocks are bought and sold on a stock exchange. Individual investors can’t go straight
to the stock exchange, so they work with a broker to buy and sell.

A stock index tracks the performance of a group of stocks that are representative of the
market overall. Investors can watch stock indexes to track past and current
performance.

Stock prices go up and down based on what investors are willing to pay. Things like a
company’s profits, company news, and how investors think a company will do in the
future can all impact a stock’s price.

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CHAPTER 8 : BIBLIOGRAPHY

 https://www.investopedia.com/financial-term-dictionary-4769738
 file:///C:/Users/ccc6/Pictures/ROLE%20OF%20STOCK
%20EXCHANGE/stock-exchange-project_compress.pdf
 https://en.wikipedia.org/wiki/Stock_exchange
 file:///C:/Users/ccc6/Pictures/ROLE%20OF%20STOCK
%20EXCHANGE/stock-market-black-book_compress.pdf
 https://byjus.com/commerce/what-is-stock-exchange/
#:~:text=Facilitates%20liquidity%3A%20The%20most
%20important,liquidity%20in%20terms%20of%20investment.
 https://www.samco.in/knowledge-center/articles/how-does-the-stock-
market-work/
 https://journals.sagepub.com/doi/full/10.1177/2158244020985529
 https://www.capitalvia.com/blog/role-of-stock-exchanges-in-the-
capital-market
 file:///C:/Users/ccc6/Pictures/
StockMarketsOverviewandLitReviewMPRA_paper_101855.pdf
 https://www.studypage.in/business-studies/advantages-and-
limitations-of-stock-exchanges
 https://www.investopedia.com/terms/n/national_stock_exchange.as
 Aggarwal, R. (1981), "Exchange rates and stock prices: a study of the
United
 States capital markets under floating exchange rates", Akron
Business and
 Economic Review, vol. 21, pp. 7-12.
 Agmon, T (1972), "The relationship among equity markets: a study
of share price
 comovement in the United States, United Kingdom, Germany and
Japan", Journal
 of Finance, Vol 27, pp 839-55.
 Ahmed, Shahid (2008), "Aggregate Economic Variables and Stock
Markets in
 India" International Research Journal of Finance and Economics,
Issue 14.
58
 Questionaire

1. Which of these is a function of the stock exchange?

a. Role of an economic barometer
b. Valuation of securities
c. Encouraging investments and savings
d. All of the above

Answer: d

2. Which of these is the regulatory body for the capital markets in India?
a. National Bank for Agriculture and Rural Development (NABARD)
b. Securities and Exchange Board of India (SEBI)
c. Insurance Regulatory and Development Authority (IRDA)
d. Reserve Bank of India (RBI)

Answer: b

3. How many companies are a part of Sensex (Stock Exchange Sensitive Index)?
a. 20
b. 30
c. 50
d. 100

Answer: b

4. Which of the following terms is not related to a stock exchange?

a. Knowledge Process Outsourcing (KPO)
b. Net Asset Value (NAV)
c. Initial Public Offering (IPO)
d. National Stock Exchange (NSE)

Answer: a

5. When was NIFTY (National Stock Exchange Fifty) established?

a. 1992
b. 1998
c. 1996
d. 1994

Answer: c

59
6. A contract between a buyer and a seller, entered on a particular date, regarding a
transaction that they will fulfil at a later date, is known as ______.
a. Forward Contract
b. Future Contract
c. Fixed Contract
d. Derivative Contract

Answer: b

7. The first computerized stock exchange in India was ________.

a. Bombay Stock Exchange (BSE)
b. Multi Commodity Exchange (MCX)
c. National Stock Exchange (NSE)
d. Over-the-Counter Exchange of India (OCTEI)

Answer: c

8. NIFTY and SENSEX are calculated based on ____________.

a. Free-Float capitalisation
b. Market capitalisation
c. Authorised share capital
d. Paid-up capital

Answer: a

9. Which of these derivatives does not get traded in the Indian Stock Exchanges?
a. Forward rate agreements
b. Index options
c. Stock futures
d. Index futures

Answer: a

10. Which of the following options is not available in India?

a. Commodity futures
b. Index options
c. Index futures
d. Commodity options

Answer: d

11. Which of the following statements is valid for mutual funds in India?
a. Entry load is allowed
b. Exit load is not allowed
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c. Exit load is allowed in some cases
d. Entry load is not allowed

Answer: c

12. The spot exchange rate is the exchange rate between two currencies for _______.
a. For future delivery
b. For delivery at a particular spot in future
c. For immediate delivery
d. None of the above

Answer: c

13. Which of these markets allows trading of securities with less than one year of maturity?
a. Global market
b. Money market
c. Capital market
d. Transaction market

Answer: b

14. The leading suppliers of trading instruments in capital markets are ______.
a. Private corporations
b. Government corporations
c. Manufacturing corporations
d. None of the above

Answer: b

15. The markets where the transactions are done through computers, and telephones,
without any specific location, are known as ________.
a. Over the counter markets
b. Capital counter markets
c. Past counter markets
d. Future counter markets

Answer: a

16. The Securities and Exchange Board of India (SEBI) is not responsible for ______.
a. Ensuring fair practices by companies
b. Investor protection
c. Improving the earnings of shareholders

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d. Promoting efficient services by brokers

Answer: c

17. Which term is apt to describe the payout made to shareholders representing their share
in the company’s profits?
a. Dividend
b. Coupon
c. Interest
d. None of the above

Answer: a

18. In primary markets, the property of shares that make it easy to sell newly issued
security is called __________.
a. Large funds
b. Increased liquidity
c. Decreased liquidity
d. Money flow

Answer: b

19. The markets where securities instruments are traded directly between buyer and seller
are known as ______.
a. Secondary markets
b. Primary markets
c. Tertiary markets
d. None of the above

Answer: b

20. In which year did the Sensex cross the 5000 point mark for the first time?
a. 1991
b. 2002
c. 1999
d. 1996

Answer: c

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