Note for Stocks and Shares - SS by Placement Factory

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CHAPTER-1 INTRODUCTION 1.0 INDIAN STOCK MARKET Before liberalization, Indian economy was tightly controlled and protected by number of measures like licensing system, high tariffs and rates, limited investment in core sectors only. During 1980’s, growth of economy was highly unsustainable because of its dependence on borrowings to correct the current account deficit. To reduce the imbalances, the government of India introduced economic policy in 1991 to implement structural reforms. The financial sector at that time was much unstructured and its scope was limited only to bonds, equity, insurance, commodity markets, mutual and pension funds. In order to structure the security market, a regulatory authority named as SEBI (Security Exchange Board of India) was introduced and first electronic exchange National Stock Exchange also set up. The purpose behind this was to regularize investments, mobilization of resources and to give credit. Mark Twain once has divided the people into types: one who has seen the great Indian monument, The Taj Mahal and the second, who have not. The same can be said about investors. There are two types of investors: those who are aware of the investment opportunities available in India and those who are not. A stock market is a place where buyers and sellers of stocks come together, physically or virtually. Participants in the market can be small individuals or large fund managers who can be situated anywhere. Investors place their orders to the professionals of a stock exchange who executes these buying and selling orders. The stocks are listed and traded on stock exchanges. Some exchanges are physically located, based on open outcry system where transactions are carried out on trading floor. The other exchanges are virtual exchanges whereas a network of computers is composed to do the transactions electronically. The whole system is order-driven, the order placed by an investor is automatically matched with the best limit order. This system provides more transparency as it shows all buy and sell orders. The Indian stock market mainly functions on two major stock exchanges, the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). In terms of market capitalization, BSE and NSE have a place in top five stock exchanges of developing economies of the world. Out of total fourteen stock exchanges of emerging economies, BSE stood at fourth position 1

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with market capitalization of $1,101.87b as on June, 2012 and NSE at fifth position with market capitalization of $1079.39b as on June, 2012. 1.1 Bombay Stock Exchange Bombay Stock Exchange is located on Dalal street, Mumbai. In terms of market capitalization, BSE is the eleventh largest stock exchange in the world on 31st December, 2012. BSE is the oldest stock exchange in India. In the beginning during 1855, some stock brokers were gathering under Banyan tree. But later on when the number of stock brokers increased, the group shifted in 1874. In 1875, the group became an official organization named as “The Native Chor and Stock Brokers Association”. In 1986, BSE developed its Index named as SENSEX to measure the performance of the exchange. Initially, there was an open outcry floor trading system which in 1995 switched to electronic trading system. The exchange made the whole transition in just fifty days. BSE Online Trading, known as BOLT is a automated, screen based trading platform with a capacity of 8 millions orders per day. BSE provides an transparent and efficient market for trading in equities, debentures, bonds, derivatives and mutual funds etc. It also provides opportunity to trade in the equities of small and medium term enterprises. About 5000 companies are listed in Bombay Stock Exchange. As on January 2013, the total market capitalization of the companies listed in BSE is $1.32 trillion. In terms of transactions handling, BSE Ltd. is world’s fifth exchange. As far as Index Options trading is concerned, BSE is one of the world’s leading exchanges. Some other services like risk management, settlement, cleaning etc. The purpose of BSE automated systems and techniques are to protect the interest of the investor, to stimulate market and to promote innovations around the world. It is the first exchange across India and second across world to get an ISO 9000:2000 certification. 1.2 National Stock Exchange The National Stock Exchange is located in Mumbai. It was incorporated in 1992 and became a stock exchange in 1993. The basic purpose of this exchange was to bring the transparency in the stock markets. It started its operations in the wholesale debt market in June 1994. The equity market segment of the National Stock Exchange commenced its operations in November, 1994 whereas in the derivatives segment, it started it operations in June, 2000. It has completely modern and fully automated 2

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screen based trading system having more than two lakh trading terminals, which provides the facility to the investors to trade from anywhere in India. It is playing an important role to reform the Indian equity market to bring more transparent, integrated and efficient stock market. As on July 2013, it has a market capitalization above than $989 billion. The total 1635 companies are listed in National Stock Exchange. The popular index of NSE, The CNX NIFTY is extremely used by the investor throughout India as well as internationally. NSE was firstly introduced by leading Indian financial institutions. It offers trading, settlement and clearing services in equity and debt market and also in derivatives. It is one of India’s largest exchanges internationally in cash, currency and index options trading. There are number of domestic and global companies that hold stake in the exchange. Some domestic companies include GIC, LIC, SBI and IDFC ltd. Among foreign investors, few are City Group Strategic Holdings, Mauritius limited, Norwest Venture Partners FII (Mauritius), MS Strategic (Mauritius) limited, Tiger Global five holdings, have stake in NSE. The National Stock Exchange replaced open outcry system, i.e. floor trading with the screen based automated system. Earlier, the price information can be accessed only by few people but now information can be seen by the people even in a remote location. The paper based settlement system was replaced by electronic screen based system and settlement of trade transactions was done on time. NSE also created National Securities Depository Limited (NSDL) which permitted investors to hold and manage their shares and bonds electronically through demat account. An investor can hold and trade in even one share. Now, the physical handling of securities eliminated so the chances of damage or misplacing of securities reduced to minimum and to hold the equities become more convenient. The National Security Depository Limited’s electronically security handling, convenience, transparency, low transaction prices and efficiency in trade which is affected by NSE, has enhanced the reach of Indian stock market to domestic as well as international investors. 1.3 Stock Market Volatility To invest money in stock market is assumed to be risky because stock markets are volatile. There is volatility in stock market because macro economic variables influence it and affect stock prices. These factors can affect a single firm’s price and can be specific to a firm. On the contrary, some factors commonly affect all the firms. For example, when stock market crashed on September 2008, the price of almost all 3

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listed companies came down. Volatility is the variation in asset prices change over a particular time period. It is very difficult to estimate the volatility accurately. Volatility is responsible to make the stock market risky but it is this only which provides the opportunity to make money to those who can understand it. It gives the investor opportunity to take advantage of fluctuation in prices, buy stock when prices fall and sell when prices are increasing. So, to take advantage of volatility it is need to be understood well. If the performance of Indian stock market is seen during last 20 years, it is found that its all about only four years 2003-2007. Some people believe that investment in stock market for longer period is always give fair returns but that’s not true. According to one study, returns in September 2001 were just 49% higher as compared to returns in September 1991, a compound return that is even lesser as compared to the return on a saving bank account deposit. In the last five years, from 2007 till 2012, the total market returns are only 5.9% per year. Source: capitalmind.in Fig 1.1: SENSEX Journey The whole growth in stock market is attained during 2003 and 2007, besides this time period, the stock market has given only substandard returns. The scrip prices have high returns but overall stock market doesn’t raise much. 1.4 Volatility Index (VIX) India VIX is a volatility index based on the index option prices of NIFTY. India VIX is computed using the best bid and ask quotes of the out-of-the-money near and midmonth NIFTY option contracts which are traded on the F&O segment of NSE. India 4