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TITLE OF THE PROJECT:

THE BEHAVIOUR OF INDIAN STOCK MARKET

REPORT SUBMITTED IN PARTIAL FULFILLMENT OF REQUIREMENT

FOR

POST GRADUATE PROGRAMME IN MANAGEMENT

BY-

AMAL SAIKIA REGISTRATION NUMBER: EIILM/PGP/08-09/4H007

SESSION: 2008-2010

UNDER THE GUIDANCE OF

EASTERN INSTITUTE FOR INTEGRATED LEARNING IN MANAGEMENT

6, WATERLOO STREET, KOLKATA ± 700069

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Declaration

The project report on ³The Behaviour of Indian Stock Market´ at KARVY

Stock Broking Ltd. is submitted by me in partial fulfillment of the requirementfor MBA from EIILM, is an original work of mine.

I declare that this project has not been published previously elsewhere; it is a

result of my own efforts and has been taken solely for the academic purposes. All

educational materials consulted in the course of study have been declared in the

Reference and all information provided in the project is true to the best of my

knowledge.

I have done this work independently under the guidance of Prof. Abhijit

Chakraborty my guide in the institute. This work has not been submitted in full

or part to any institute or university for the award of any degree /diploma.

________________

Amal Saikia

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TABLE OF CONTENTS

Acknowledgement ................................ ................................ ................. Error! Bookmark not defined.

Declaration ................................ ................................ ................................ ................................ ........... 2

1. Company Profile: ................................ ................................ ................................ .......................... 3

2. Introduction: ................................ ................................ ................................ ................................ . 9

3. Objective: ................................ ................................ ................................ ................................ ... 10

4. Methodology: ................................ ................................ ................................ ............................. 11

4.1 Data Collection: ................................ ................................ ................................ .................. 11

5. Data Projection and Analysis: ................................ ................................ ................................ ..... 12

5.1 STOCK MARKET: ................................ ................................ ................................ ............. 12

5.2 Functioning of the Stock Market ................................ ................................ .......................... 13

5.3 Stock Market and Economic Growth: ................................ ................................ .................. 14

5.4 Stock Market in India: ................................ ................................ ................................ ......... 14

5.5 Bombay Stock Exchange (BSE): ................................ ................................ ......................... 18

5.6 SENSEX - The Barometer of Indian Capital Markets ................................ ........................... 19

5.7 Major Indian Stock Market Reforms: ................................ ................................ ................... 26

5.8 National Stock Exchange (NSE): ................................ ................................ ......................... 27

5.9 FOREIGN INSTITUTIONAL INVESTMENTS AND THE INDIAN STOCK MARKET: .. 316. Market Trend: ................................ ................................ ................................ ............................. 33

6.1 BULL MARKET: ................................ ................................ ................................ ............... 35

6.2 BEAR MARKET: ................................ ................................ ................................ ............... 39

7. Volatility:................................ ................................ ................................ ................................ ... 42

8. Findings: ................................ ................................ ................................ ................................ ... 47

9. Recommendtions: ................................ ................................ ................................ ..................... 48

10. Conclusion: ................................ ................................ ................................ ............................... 49

11. Limitations:................................ ................................ ................................ ............................... 50

12. References: ................................ ................................ ................................ ............................... 51

13. Annexure: ................................ ................................ ................................ ................................ . 52

1. Company Profile:

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KARVY STOCK BROKING LTD

KARVY is one of the premier integrated financial intermediaries in the country, which is intobusinesses such as Merchant Banking, Stock Broking, Depository Participant Services,

Financial Products Distribution, Mutual Fund Servicing and Registrar and Transfer Agents. It¶sa premier integrated financial services provider, and ranked among the top five in the countryin all its business segments, services over 16 million individual investors in various capacities,and provides investor services to over 300 corporate. Karvy covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financialproducts ± mutual funds, bonds, fixed deposit, equities, Insurance Broking, CommoditiesBroking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance,placement of equity and IPOs.

BACKGROUND

In 1982, a group of Hyderabad-based practicing Chartered Accountants started KarvyConsultants Limited with a capital of Rs.1,50,000 offering auditing and taxation servicesinitially. Later, it forayed into the Registrar and Share Transfer activities and subsequently intofinancial services. All along, Karvy¶s strong work ethic and professional background leveragedwith Information Technology enabled it to deliver quality to the individual. A decade of commitment, professional integrity and vision helped Karvy achieve a leadership position in itsfield when it handled the largest number of issues ever handled in the history of the Indianstock market in a year. Thereafter, Karvy made inroads into a host of capital market services,corporate and retail, which proved to be a sound business synergy. The birth of Karvy was on amodest scale in 1981. It began with the vision and enterprise of a small group of practicingChartered Accountants who founded the flagship company Karvy Consultants Limited. Itstarted with consulting and financial accounting automation, and carved inroads into the field

of registry and share accounting by 1985. Since then, it has utilized its experience andsuperlative expertise to go from strength to strength, to better its services, to provide new ones,to innovate, diversify and in the process, evolved Karvy as one of India¶s premier integratedfinancial service enterprise. Thus over the last 20 years Karvy has traveled the success route,towards building a reputation as an integrated financial services provider, offering a widespectrum of services.

The business of KCL includes:

Equity services.

Mutual Funds Services. Insurance advisory.

Tax Advisory.

Home Loans.

THE KARVY CREDO

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³Our Clients. Our Focus

Clients are the reason for our being.´

Personalized service, professional care; pro-activeness are the values that help the organisation

nurture enduring relationships with clients.

Respect for the individual Each and every individual is an essential building block

of the organization.

Teamwork

None of us is more important than all of us

Responsible Citizenship

A social balance sheet is as rewarding as a business one.

As a responsible corporate citizen, Karvy¶s duty is to foster a better environment in the societywhere we live and work. Abiding by its norms, and behaving responsibly towards theenvironment, is some of our growing initiatives towards realizing it.

KARVY STOCK BROKING PRIVATE LIMITED

Member- Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and HyderabadStock Exchange (HSE).

Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freel towards

attaining diverse goals of the customer through varied services, creating a plethora of opportunities for the customer by opening up investment vistas backed by researchbasedadvisory services. Here, growth knows no limits and success recognizes no boundaries.

Stock broking services

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success rateas a wealth management and wealth accumulation option. The difference betweenunpredictability and a safety anchor in the market is provided by in-depth knowledge of marketfunctioning and changing trends, planning with foresight and choosing one option with care.This is what it provides in the Stock Broking services. It offers services that are beyond just amedium for buying and selling stocks and shares, rather services which are multi dimensional

and multi-focused in their scope. There are several advantages in utilizing its Stock Brokingservices, which are the reasons why it is one of the best in the country. Karvy offers trading ona vast platform; National Stock Exchange, Bombay Stock Exchange and Hyderabad Stock Exchange. More importantly, it makes trading safe to the maximum possible extent, byaccounting for several risk factors and planning accordingly. This crucial information is givenas a constant feedback to the customers, through daily reports delivered thrice daily-

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The Pre-session Report, where market scenario for the day is predicted. The Mid-session Report, timed to arrive during lunch break, where the market forecast

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

itself is reviewed.

To add to this repository of information, it publish a monthly magazine; Karvy, The Finapolis,which analyzes the latest stock market trends and takes a close look at the various investmentoptions, and products available in the market, while a weekly report, called; Karvy BazaarBaatein, keeps the investors more informed on the immediate trends in the stock market. Inaddition, the specific industry reports give comprehensive information on various industries.Besides this, it also offer special portfolio analysis packages that provide daily technical adviceon scrip for successful portfolio management and provide customized advisory services helpingto make the right financial moves that are specifically suited to the concern portfolio.

Karvy¶s Stock Broking services are widely networked across India, with the number of trading

terminals providing retail stock broking facilities. To empower the investor further thecompany has made serious efforts to ensure that our research calls are disseminatedsystematically to all our stock broking clients through various delivery channels like email,chat, SMS, phone calls etc. Its foray into commodities broking has been path breaking and weare in the process of converting existing traders in commodities into the more organizedmainstream of trading in commodity futures, both as a trading and risk hedging mechanism.

Depository participants

The onset of the technology revolution in financial services Industry saw the emergence of Karvy as an electronic custodian registered with National Securities Depository Ltd (NSDL)

and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards enabling further comfort to the investor by promoting paperless trading across the country and emerged as thetop 3 Depository Participants in the country in terms of customer service. Offering a widetrading platform with a dual membership at NSDL and CDSL, Karvy is a powerful medium for trading and settlement of dematerialized shares.

www.karvydp.nic.in

Distribution of Financial Product

The paradigm shift from pure selling to knowledge based selling drives the business today.

With the wide portfolio offerings, it occupies all segments in the retail financial servicesindustry. A 1600 team of highly qualified and dedicated professionals drawn from the best of academic and professional backgrounds arecommitted to maintaining high levels of client service delivery. This has propelled to a positionamong the top distributors for equity and debt issues with an estimated market share of 15% interms of applications mobilized, besides being established as the leading procurer in all publicissues. To further tap the immense growth potential in the capital markets we enhanced the

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scope of the retail brand, Karvy ± the Finapolis, thereby providing planning and advisoryservices to the mass affluent.

http://mfportfolio.karvy.com/

Advisory Services

Under the retail brand µKarvy ± the Finapolis', it deliver advisory services to a cross-section of customers. The service is backed by a team of dedicated and expert professionals with variedexperience and background in handling investment portfolios. They are continually engaged indesigning the right investment portfolio for each customer according to individual needs andbudget considerations with a comprehensive support system that focuses on trading customers'portfolios and providing valuable inputs, monitoring and managing the portfolio through variedtechnological initiatives.

www.the-finapolis.com

Private client group

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

Quality Policy

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide superior quality financialservices. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives

As per the Quality Policy, Karvy will:

Build in-house processes that will ensure transparent and harmonious relationshipswith its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that willhelp in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with adequateknowledge & skills so as to respond to customer's needs.

Continue to uphold the values of honesty & integrity and strive to establish

Unparalleled standards in business ethics. Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and clients.

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Strive to be a reliable source of value-added financial products and services andconstantly guide the individuals and institutions in making a judicious choice of it.

Strive to keep all stake-holders (shareholders, clients, investors, employees,Suppliers and regulatory authorities) proud and satisfied.

Karvy has always believed in adding value to services it offers to clients. A top-notch researchteam based in Mumbai and Hyderabad supports its employees to advise clients on their investment needs. On a typical working day Karvy:

Has more than 25,000 investors visiting our 575 offices. Publishes / broadcasts at least 50 buy / sell calls. Attends to 10,000+ telephone calls. Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises,

allotment / refund advises. Executes 150,000+ trades on NSE / BSE. Executes 50,000 debit / credit in the depositary accounts. Advises 3,000+ clients on the investments in mutual funds.

Achievements:

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

Adjudged as one of the top 50 IT uses in India by MIS Asia. Full Fledged IT driven operations.

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2. Introduction:

Stock prices change everyday in the market. Buyers and sellers cause prices to change as theydecide how valuable each stock is. Basically, share prices change because of supply and

demand. If more people want to buy a stock, then the price of that stock moves up. Conversely,if more people want to sell a stock, there would be more supply (sellers) than demand (buyers),the price would start to fall. In financial term, this is called as Volatility. Volatility is asymptom of a highly liquid stock market. Pricing of securities depends on volatility of eachasset. An increase in stock market volatility brings a large stock price change of advances or declines. Investors interpret a raise in stock market volatility as an increase in the risk of equityinvestment and consequently they shift their funds to less risky assets. Technically, volatility isfound by calculating the "standard deviation" of the daily change in price. If the price of aninvestment moves up and down by large percentage amounts, and in short periods of time, ithas high volatility. If the price almost never changes, or only by very small amounts, then it hasvery low volatility.

It has an impact on business investment spending and economic growth through a number of channels. Changes in local or global economic and political environment influence the shareprice movements and show the state of stock market to the general public.

The behavior of Stock Market and the prices of stocks depend greatly on the speculation of theinvestors. So, over- reactions and wrong speculation can give rise to irrational behavior of theStock Market. Excessive optimistic speculation of future prospects can raise the prices of stocks to an extreme high and excessive pessimism on the part of the investors can result inextremely low prices. Stock Market behavior is also affected by the psychology of ³GroupThinking´. The thinking of a majority group of people many times influences others to think inthe same line and the Stock Market behavior gets naturally affected.

Sometimes the Stock Market behavior is affected by rumors and mass panic. The prices of thestocks fluctuate tremendously by the economic use even if it has nothing to done with values of stocks and securities.

So, it is extremely difficult to make predictions about the Stock Market and the inexperiencedinvestors who are not that much interested in financial analysis of stocks; rarely get the

financial assistance from the Stock Market at the time of need.

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3. Objective:

Share in the market offer a high capital appreciation but the movement of the share price isalways like a wave and tide motion of the sea. Volatility in the stock return is an integral part of

stock market with the alternating bull and bear phases. In the bullish market, the share pricessoar high and in the bearish market share prices fall down and these ups and downs determinethe return and volatility of the stock market. Volatility is a symptom of a highly liquid stock market. Pricing of securities depends on volatility of each asset. It has an impact on businessinvestment spending and economic growth through a number of channels. Changes in local or global economic and political environment influence the share price movements and show thestate of stock market to the general public. The issues of return and volatility have becomeincreasingly important in recent times to the Indian investors, regulators, brokers, policymakers, dealers and researchers with the increase in the FIIs investment. Hence an analysis hasbeen made to know the volatility trend in the Indian stock market and the reasons for the bear and bull trend in the market. Nifty and Sensex are taken as representative of Indian markets.

This project gave me opportunity to have an idea about volatility in stock market. This gave meidea about and fundamental analysis in stock market and how trading is being done in stock market.

The objectives of the project can be mentioned as below:

To study volatility in Indian stock market while taking SENSEX of Bombay stock exchange as a source of secondary data which broadly represent Indian stock marketalong with NIFTY of National Stock Exchange.

To study the factors which are making Indian stock market volatile. Build understanding of central ideas of stock market.

Develop familiarity with the analysis of stock market.

Furnish institutional material relevant for understanding the environment in whichtrading decisions are taken.

Understanding of Bull Market and Bear Market.

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

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4. Methodology:

Methodology means the methods, processes or tools used in driving the project. At the very

biggining, an overview of the stock market is given. The level of SENSEX at various points of time and causes for the same is given. Some graphs and tables also used here. Bull market and

Bear market have been broadly described in the report. Volatility of Indian stock market is

analysed through graph and table. The returns in bull and bear phase are also given. Hence an

analysis has been made to know the volatility trend in the Indian stock market and the reasons

for the bear and bull trend in the market.

4.1 Data Collection:

All the data are collected from secondary source, i.e, magazines, newspapers, websites etc.Data were collected from BSE Sensex and NSE Nifty. Sensex is a basket of 30 constituent

stocks representing a sample of large, liquid and representative companies. Due to its wideacceptance amongst the Indian investors, sensex is regarded the pulse of the Indian stock market. Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy.Hence these two indices were taken for the study.

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The stock market is one of the primary most important sources for companies to raise money.The continuously rising share prices tend to be associated with increased business investmentand vice versa in the Stock Market.Share prices also affect the wealth of households and their consumption. So, central banks keepa bull's eye on the magnificent control and behavior of the market.

Stock market investment:

Stock Market Investment refers to the investment in the market; where exchange of company

stocks or collective shares of the companies and other kinds of securities and derivatives takes

place. Stocks are traded in Stock Market by the help of Stock Exchange.

The Stock Exchange brings the sellers and buyers of stocks and securities under same roof. The

available stocks are listed and traded in the Stock Exchange among the buyers and the sellers.

Proper investment in Stock Market essentially requires detailed knowledge of Stock Market,

its¶ participants, knowledge about the functioning, behavior and contribution of the stock

market.

Main Participants of the Stock market

The main participants of Stock Market are the individual investors, banks, insurance

companies, mutual funds and pension funds. Since, markets of today have turned more

³institutionalized´, the largest share of the market participation comes from the large

institutions rather than individual rich investors.

5.2 Functioning of the Stock Market

The stock market functions through the Stock Exchanges. Stock Exchanges can be a physical

entity and sometimes a virtual entity. In physical stock exchanges, transactions are made by

auctioning. In this case, a buyer offers a specific price for a stock by verbal bid and the seller

asks a specific price for the stock. When the buyer¶s bid price and seller¶s price match,

exchange of stock takes place. In the presence of multiple buyers and sellers market operations

are carried on a first come first served basis.

Contribution of Stock Market

Stock Market is the best medium of raising funds. Businesses which need financing for

expansion or improvement can easily raise required capital by participating in Stock Market.

On the other hand, for the investors; investing in stocks is a better option than investing in

property or real estate as the stocks contain more liquidity than any other property. This means,stocks can be sold more easily and quickly than any other property and so, the investors can get

their money back by selling the stocks anytime they need.

The prices of stocks or shares in the Stock Market have strong effects on the economy in

various ways. Prices of stock influence business investment, individual household consumption

and wealth of individual households. For this deepening effect, Central banks of each country

keep a track of the Stock Market activities. A proper functioning of Stock Market in a country

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can result in low costs, increased production of goods and services and increased level of

employment. In this way, an efficient Stock Market can contribute to economic growth of the

country.

5.3 Stock Market and Economic Growth:

A country¶s economic growth is largely associated with the changing dynamics of its stock

market. Since Independence, Indian stock market has been incessantly growing. Manygovernment norms and regulations have been formulated so as to keep the market free from

trickery and deception. In spite of all these norms and regulations, Indian Stock market couldnot be totally sterilized from scams; even through the performance was quite noticeable. But

the market got a boost after the financial reforms which opened the doorway for FII inflow.

Economic growth of the nations is closely linked with the liquidity of the stock market existingin the country. The concept of liquidity that is dealt here is market liquidity, which stands insharp contrast to the definition of liquidity from the point of view of a firm. The stock markets

around the globe contribute to the economic development by imparting liquidity to the capitalinvestments. It is this market that allows entry even to the small savers, who invests their savings for short peroids. The liquidity of the stock market enables them to sell off their shareseasily within a short span of time, which has undoubtedly attracted investments in shares.

However, the most profitable business requires long-term investments. When the smallpotential investors reach the comfort zone in terms ±term of investing in long-term equities,they balance their portfolios more towards long-term investments. This balancing mechanismforces the financial units to shift towards more profitable, productive and long-term products,resulting in higher capital productivity. The higher-productivity capital boosts economicgrowth and raises the returns on equity investment, which further increases the incentives tosave and invest and hence, furthers economic growth.

So, we have to focus on the linkage between the stock market and economic growth. On thepositive side, a well-functioning stock market helps in developing the economy through thegrowth of savings, efficient allocation of investment resources and better utilization of theexisting resources. However, on the otherhand, the analysts view stock market as a place,where the owners buy and sell stocks according to their convenience. This often affects theprofitability of the firms by affecting the funds available to them. In this processs, economicgrowth gets hampered due to the volatile nature of the stock market. Hence, the aspect of volatity needs to be addressed.

5.4 Stock Market in India:

The origin of the stock market in India dates back to the end of the eighteenth century whenlong-term negotiable securities were first issued. The real beginning, however, occurred in themiddle of the eighteenth century, after the enactment of the companies Act in 1850 which

introduced the feature of limited liability, and generated investor interest in corporatesecurities.

The stock market is also known as secondary market. In India, the secondary market consists of

recognized stock exchanges operating under rules, by-laws and regulations duly approved by

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government. These stock exchanges constitute an organized market where securities issued bythe central and state governments, public bodies, and joint stock companies are traded. A stock exchange is defined under Section 2(3) of the Securities Contracts (Regulation) Act, 1956, ³asany body of individual whether incorporated or not, constituted for the purpose of assisting,regulating or controlling the business of buying, selling or dealing in securities.´

Thus, a stock exchange, (formerly a securities exchange) is a corporation or mutual organizationwhich 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 aswell as other financial instruments and capital events including the payment of income anddividends.

The securities traded on a stock exchange include: shares issued by companies, unit trusts,derivatives, pooled investment products and bonds. Everyday, stocks are exchanged and tradedin numerous stock markets around the world. The liquidity they bring a vital component of economic growth.

Stock exchanges are open markets that trade financial assets. Whether associated with acompany or acting as an individual, a stock exchange is the place where stocks are bought andsold. There are a number of major stock exchanges around the world and each of these plays apart in determining the overall financial and economic condition of any economy.

Stock exchanges deal with a number of financial instruments such as stocks, bonds andequities. Both corporate and government bonds are traded in stock exchanges. Equities includepopular investment options, rights issues, bonus issues, and all other forms of shares andstocks. The actual trading of stocks takes place through mediators such as financial advisors,brokerage houses, and stockbrokers.

POST-REFORMS STOCK MARKET SCENARIO:

After the initiation of reforms in 1991, the Indian stock market now has a three-tier form:

Regional stock exchanges. The National Stock exchange (NSE). The Over the counter exchange of India (OTCEI).

The NSE was set up in 1994. It was the first modern stock exchange to bring in new

technology, new trading practices, new institutions, and new products. The OTCEI was set upin 1992 as a stock exchange providing small and medium-sized companies the means togenerate capital.

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The Organizational forms of the various recognized stock exchanges in India as follows:

Mumbai, Ahmedabad, Patna, Indore ----------- Voluntary non-profit making. Kolkata, Delhi, Bangalore, Cochin,

Kanpur, Guwahati, Ludhiana, Chennai------------ Public limited company.

Hyderabad, Pune, Rajkot, Magadh ----------------Company by gurantee.

The National Stock Exchange -----------------------A tax-paying company incorporatedunder the Companies Act and promoted byleading financial institutions and banks.

The Over the Counter Exchange Of India ----------A company under Section 25 of theCompanies Act, 1956.

Functions of Stock Exchanges: An Overview

The main function of a stock exchange is to facilitate the transactions associated with both thebuying and selling of securities. Buyers and sellers of shares and stocks can track the pricechanges of securities from the stock markets in which they operate. The ups and downs of stock indexes help the investors to speculate on the return on investment (ROI) of various investmentoptions.

Stock exchanges also serve as a source of capital formation for listed companies. Businessentities that are listed in a particular stock exchange can issue shares to the public and sell thoseshares in that market.

To take part in these transactions, listed companies need to abide by the rules and requirementsof that market. The stock exchanges protect the interests of both buyers and sellers by assuringa timely transfer of money. The participants of a stock market are required to operate within thespecified transaction limits fixed by the regulatory authority of that stock market.

Speed and transparency are vital for all stock market transactions. The companies listed in astock exchange need to provide proper guidance regarding business performance and prospects,mergers and acquisitions, stock prices, dividends and other information at all times. Investorsmake their investment decisions based on the information obtained from these companies.

How Stock Exchanges Operate:

With the help of stockbrokers, the buyers and sellers participating in a stock market carry out

their transactions. The brokers representing selling parties take their orders to the stock exchange floor and then find brokers representing parties willing to invest in similar stocks. If

both parties agree to trade at the fixed price, the transaction takes place.

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1980 1985 1990 1991 2000 2009

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No. of Stock Exchange

T l St exchanges have multi le roles in the economy, this may include the following:

R aising capital for businesses.

Mobili ing savings for investment. Facilitating company growth.

R edistr ibution of wealth.

Corporate governance.

Creating investment oppor tunities for small investors.

Barometer of the economy.

Pattern of Growth of Stock E change:

In the f igure, we can see the growth

of Indian Stock Exchanges. Af ter

independence, we had only 7 stock

exchanges. The Calcutta Stock

Exchange (CSE) was the largest stock

exchange in India till 1960s. In order

to promote the oder ly development of

the stock market, number of stock

exchanges has been increased. Again,

af ter the announcement of neweconomic policy in 1991, the number

increase to 22.

And, at present, there are 23 stock exchanges in India ± 19 regional Stock Exchanges, BSE,

NSE, OCTEI and the Interconnected Stock Exchange of India (ICSE).

ow to f ind a good stock?

There are some factors that can help predict whether a stock is good or questionable, and thesecan help one to determine the best stocks for his por tfolio and needs. Some of ways to identify

a good stock are mentioned below:

C A

EX Cap it al Ex pend it e:

One way to identify a good stock is by look ing at the CAPEX, or capital expenditure,

compared to other similar stocks in the same industry. Make sure that the stocks being

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compared are from the same industry and that the companies are similar, otherwise the stock analysis will be inaccurate and the stock may not be such a good deal. Consumer stocks, suchas Coca Cola and Nestle, usually have a minimum or low capital expenditure. Having a lowcapital expenditure means that the company uses their operating profits for investment fundinginstead of taking out loans that can have fluctuating interest rates and cost money. During an

economic recession, low CAPEX stocks are a better bet than many from heavy industriesbecause of the fluctuation of interest rates when the economy falls.

Reliability:

Finding a good stock also means looking at other factors; one of which is reliability. Choosestock in a company that has been shown to be reliable and that has a high potential for growth.Look at the price the stock is currently listed at and evaluate this price against the currentcompany condition and the potential for future growth. This evaluation will help youdetermine whether the stock price is reasonable, which makes it a good stock, or if it is inflatedcompared to the current situation and conditions.

Risk and t he level of reward:

The higher the risk, the better a reward is going to be if the stock performs well. One shoulddetermine what level of risk he is willing and can afford to take, and only choose stocks thatreflect this risk level. There are many different formulas that can be used to try and place valueon a stock, and each investor will be able to tell what formula they are most comfortable within determining whether a stock is good or bad.

Hi g h profit margin:

A good stock should have a high profit margin. The profit margin of a company will alert youto vital information concerning the effectiveness of the current company management. A goodmanagement team will be able to reduce the operating costs of a company and at the same timeincrease revenue and possibly growth as well. When comparing and evaluating stocks, oneshould look at those with the highest profit margins.

Any investment carries some risk, but choosing a good stock can minimize the risks of theinvestment and maximize the gains one will see. One should look for stocks that have gonedown in price simply because of market conditions and not because of problems with themanagement or company. With the way the stock prices have dropped in the last six months,there are plenty of excellent stock choices available, and the prices are low simply becausealmost all stock prices have fallen and many investors wanted out of the market before it couldcrash. Some of these stocks represent a great investment opportunity because the price is good

and the company is solid.

5.5 Bombay Stock Exchange (BSE):

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, nowspanning three centuries in its 133 years of existence. What is now popularly known as BSEwas established as "The Native Share & Stock Brokers' Association" in 1875.

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BSE is the first stock exchange in the country which obtained permanent recognition (in 1956)from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE'spivotal and pre-eminent role in the development of the Indian capital market is widelyrecognized. It migrated from the open outcry system to an online screen-based order driventrading system in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatised

and demutualised entity incorporated under the provisions of the Companies Act, 1956,pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by theSecurities and Exchange Board of India (SEBI). With demutualisation, BSE has two of world'sbest exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector byproviding it with an efficient access to resources. There is perhaps no major corporate in Indiawhich has not sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies andthe world's 5th in transaction numbers. The market capitalization as on December 31, 2007

stood at USD 1.79 trillion. An investor can choose from more than 4,700 listed companies,which for easy reference, are classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, andis tracked worldwide. It is an index of 30 stocks representing 12 major sectors. The SENSEX isconstructed on a 'free-float' methodology, and is sensitive to market sentiments and marketrealities. Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It brings

to the investors a trading tool that can be easily used for the purposes of investment, trading,hedging and arbitrage. SPIcE allows small investors to take a long-term view of the market.

Awards:

y The World Council of Corporate Governance has awarded the Golden Peacock GlobalCSR Award for BSE's initiatives in Corporate Social Responsibility (CSR).

y The Annual Reports and Accounts of BSE for the year ended March 31, 2006 andMarch 31 2007 have been awarded the ICAI awards for excellence in financialreporting.

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

5.6 SENSEX - The Barometer of Indian Capital Markets

BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted indexcomposed of 30 stocks started in 01 of Jan, 1986. It consists of the 30 largest and most activelytraded stocks, representative of various sectors, on the Bombay Stock Exchange. Thesecompanies account for around one-fifth of the market capitalization of the BSE. The base valueof the sensex is 100 on April 1, 1979, and the base year of BSE-SENSEX is 1978-79.

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At irregular intervals, the Bombay Stock Exchange (BSE) authorities review and modify itscomposition to make sure it reflects current market conditions. The index is calculated based ona free-float capitalization method; a variation of the market cap method. Instead of using acompany's outstanding shares it uses its float, or shares that are readily available for trading.The free-float method, therefore, does not include restricted stocks, such as those held by

company insiders.

The index has increased by over ten times from June 1990 to the present. Using informationfrom April 1979 onwards, the long-run rate of return on the BSE Sensex works out to be 18.6%per annum, which translates to roughly 9% per annum after compensating for inflation.

Index Specification:

Base Year :1978-79

Base Index Value :100

Date of Launch : 01-01-1986

Method of

calculation

: Launched on full market capitalization method and effectiveSeptember 01, 2003, calculation method shifted to free-floatmarket capitalization.

Number of scrips : 30

Index calculationfrequency

: 15 seconds

Companies Listed in the Sensex:

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

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(As of January 12, 2009)

Code Name Sector Market Cap

(Rs. In Crore)

Weight in

Index (%)

500410 ACC

Housing Related 15,500.35 0.87

500103 BHEL Capital Goods 100,672.24 3.29

532454 Bharti Airtel Telecom 156,785.10 5.12

532868 DLF Universal Limited* Housing related 110,217.43 1.54

500300 Grasim Industries Diversified 23,603.36 1.65

500010 HDFC

Finance 67,579.99 5.36

500180 HDFC Bank Finance 46,771.18 3.49

500440 Hindalco Industries Metal, Metal Products &

Mining

20,217.87 1.32

500696 Hindustan Lever Limited

FMCG 49,804.67 2.32

532174 ICICI Bank

Finance 85,589.54 7.98

500209 Infosys Information Technology 81,783.17 6.49

500875 ITC Limited

FMCG 77,736.80 5.08

532532 Jaiprakash Associates Housing Related 26,524.96 1.48

500510 Larsen & Toubro

Capital Goods 88,321.36 7.42

500520 Mahindra & Mahindra

Limited

Transport Equipments 17,095.03 1.28

532500 Maruti Udyog Transport Equipments 23,966.53 1.12

532555 NTPC

Power 162,435.65 2.27

500312 ONGC

Oil & Gas 209,898.26 3.29

500359 Ranbaxy Laboratories Healthcare 16.375.36 1.07

532712 Reliance Communications

Telecom 104,914.49 3.43

500325 Reliance Industries

Oil & Gas 329,178.73 15.35

500390 Reliance Infrastructure Power 29,593.48 1.93

500112 State Bank of India Finance 100,976.76 4.24

500900 Sterlite Industries* Metal, Metal Products, and

Mining

18,428.34 0.95

524715 Sun Pharmaceutical

Industries*

Healthcare 26,441.43 2.34

532540 Tata Consultancy Services Information Technology 79,355.53 1.85

500570 Tata Motors

Transport Equipments 24,033.43 1.35

500400 Tata Power* Power 17,080.98 1.04

500470 Tata Steel

Metal, Metal Products &

Mining

50,685.24 3.31

507685 Wipro

Information Technology 62,133.50 1.16

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DLF replaced Dr. Reddy's Lab on November 19, 2007. Sterlite Industries replaced Ambuja Cements on July 28, 2008. Tata Power Company replaced Cipla Ltd. on July 28, 2008. Sun Pharmaceutical Industries replaced Satyam Computer Services on January 8, 2009.

Sensex milestones:

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

y 1000, July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for thefirst time and closed at 1,001 in the wake of a good monsoon and excellent corporateresults.

y 2000, January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark andclosed at 2,020 followed by the liberal economic policy initiatives undertaken by thethen finance minister and current Prime Minister Dr Manmohan Singh.

y 3000, February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000

mark in the wake of the market-friendly Budget announced by Manmohan Singh.

y 4000, March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark andclosed at 4,091 on the expectations of a liberal export-import policy. It was then that theHarshad Mehta scam hit the markets and Sensex witnessed unabated selling.

y 5000, October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark as

the Bharatiya Janata Party-led coalition won the majority in the 13th Lok Sabhaelection.

y 6000, February 11, 2000 - On February 11, 2000, the information technology boomhelped the Sensex to cross the 6,000-mark and hit and all time high of 6,006.

y 7000, June 21, 2005 - On June 20, 2005, the news of the settlement between theAmbani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy,Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000points for the first time.

y 8000, September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange'sbenchmark 30-share index ± the Sensex - crossed the 8000 level following brisk buyingby foreign and domestic funds in early trading.

y 9000, December 9, 2005 - The Sensex on November 28, 2005 crossed 9000 to touch9000.32 points during mid-session at the Bombay Stock Exchange on the back of frantic buying spree by foreign institutional investors and well supported by localoperators as well as retail investors.

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y 10,000, February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 pointsduring mid-session. The Sensex finally closed above the 10,000-mark on February 7,2006.

y 11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and touched apeak of 11,001 points during mid-session at the Bombay Stock Exchange for the firsttime. However, it was on March 27, 2006 that the Sensex first closed at over 11,000points as robust foreign fund inflows and a move by government towards greater capitalaccount convertibility.

y 12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched apeak of 12,004 points during mid-session at the Bombay Stock Exchange for the firsttime in the wake of massive buying from mutual funds around Rs. 3400 cr. in just 19trading sessions, favourable credit policy.

y 13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 for the

first time. It touched a peak of 13,039.36 and finally closed at 13,024.26. Sensex driverswere fund infusion from market players, falling oil prices, strong second quarter resultsfrom technology and banking companies, robust growth in infrastructure sector.

y 14,000, December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000 in thewake of strong FII inflow and healthy corporate earnings.

y 15,000, July 6, 2007 - The Sensex on July 6, 2007 crossed 15,000 mark.

y 16,000, September 19, 2007 - The Sensex on September 19, 2007 crossed the 16,000mark.

y 17,000, September 26, 2007 - The Sensex on September 26, 2007 crossed the 17,000mark for the first time.

y 18,000, October 9, 2007 - The Sensex on October 09, 2007 crossed the 18,000 mark for the first time.

y 19,000, October 15, 2007 - The Sensex on October 15, 2007 crossed the 19,000 mark for the first time.

y 20,000, October 29, 2007 - The Sensex on October 29, 2007 crossed the 20,000 mark for the first time. The main drivers were strong FII buying coupled with short coveringled to sharp up move. Registration of FIIs and Participatory Note issue clarification has

put momemtum into sensex.

y 21,000, Jan 08, 2008 - The Sensex on January 08, 2008 touched all time peaks of 21078 before closing at 20873 due to expectation of excellent quaterly result and strongforward momemtum.

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Graphical Presentation:

May 2 9

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

Sensex falls:

The top 18 single-day falls of the Sensex have occurred on the following dates:

January 21, 2008 ---------1,408.35 points Oct 24, 2008---------------1070.63 points

March 17, 2008 --- -------951.03 points January 22, 2008 ---------857 points

February 11, 2008 --------833.98 points May 18, 2006 --------------826 points

October 10,2008 --------- 800.10 points March 13, 2008 --- -------770.63 points

December 17, 2007 ----- 769.48 points January 7,2009 ------------749.05 points

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

6-Jul-( 7 29-Oct-

( 7 8-Jan-

( 8 21-Jan-

( 8 24-Oct-

( 8 18-May-

( 9 1

( -Aug-

( 9

1

221

17605

8700

14284 15010

Sensex level

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Major crashes since 2000:

May 2006

On May 22, 2006, the Sensex plunged by 1100 points during intra-day trading, leading to thesuspension of trading for the first time since May 17, 2004. The volatility of the Sensex hadcaused investors to lose Rs 6 lakh crore ($131 billion) within seven trading sessions. TheFinance Minister of India, P. Chidambaram, made an unscheduled press statement whentrading was suspended to assure investors that nothing was wrong with the fundamentals of theeconomy, and advised retail investors to stay invested. When trading resumed after thereassurances of the Reserve Bank of India and the Securities and Exchange Board of India(SEBI), the Sensex managed to move up 700 points, still 450 points in the red.

The Sensex eventually recovered from the volatility, and on October 16, 2006, the Sensex

closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76. This was a result of increased confidence in the economy and reports that India's manufacturing sector grew by

11.1% in August 2006.

Effects of t he subprime crisis in t he U.S. :

On July 23, 2007, the Sensex touched a new high of 15,733 points. On July 27, 2007 the

Sensex witnessed a huge correction because of selling by Foreign Institutional Investors andglobal cues to come back to 15,160 points by noon. Following global cues and heavy selling in

the international markets, the BSE Sensex fell by 615 points in a single day on August 1, 2007.

January 2008

In the third week of January 2008, the Sensex experienced huge falls along with other markets

around the world. On January 21, 2008, the Sensex saw it¶s highest ever loss of 1,408 points atthe end of the session. The Sensex recovered to close at 17,605.40 after it tumbled to the day'slow of 16,963.96, on high volatility as investors panicked following weak global cues amidfears of a recession in the US.

The next day, the BSE Sensex index went into a free fall. The index hit the lower circuit

breaker in barely a minute after the markets opened at 10 AM. Trading was suspended for anhour. On reopening at 10.55 AM IST, the market saw its biggest intra-day fall when it hit a low

of 15,332, down 2,273 points. However, after reassurance from the Finance Minister of India,the market bounced back to close at 16,730 with a loss of 875 points.

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Gigantic drops of the SENSEX in a day

Of the six major falls of sensex in a day, three can be attributed to political developments andrests to scams. Political stability and scams have, to a large extent, influenced the marketinvestor sentiment ---- domestic and international.

Date Fall (points) Culprits

28th

April 1992 570 Harshad Mehta involved in scam.

12th May 1992 333 Full effect of the scam.

9th May 1992 327 National Housing Bank involved in ascam.

31st March 1997 303 Congress withdraws support to DeveGowda¶s government

17th

April 1999 246 Vajpayee¶s government falls.

17th May 2004 894.31 Defeat of the BJP-led NDA

government.6th July, 2009 869 2009-10 Union Budget.

5.7 Major Indian Stock Market Reforms:

Securities and Exchange Board of India (SEBI):

On 31st March 1992, the SEBI was established as an autonomous and statutory body. The SEBIis the regulatory authority to oversee the new issues, protect the interests of investors, promotethe development of the capital market and regulate the working of stock exchanges. It has

initiated a number of measures in these directions such as registration of intermediaries, strictdisclosure norms, regulations on insider trading and inspection of the functioning of the stock exchanges and mutual funds, etc.

Over-the-Counter Exchange of India (OTCEI):

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

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5.8 National Stock Exchange (NSE):

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading system on par with the international standards. On the basis of the

recommendations of high powered Pherwani Committee, the National Stock Exchange wasincorporated in 1992 as a tax-paying company unlike other stock exchanges in the country byIndustrial Development Bank of India, Industrial Credit and Investment Corporation of India,Industrial Finance Corporation of India, all Insurance Corporations, selected commercial banksand others.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 inApril 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment inJune 1994. The Capital Market (Equities) segment commenced operations in November 1994and operations in Derivatives segment commenced in June 2000.

The NSE was incorporated with the following objectives:-

To establish a nationwide trading facility for equities, debt intruments and hybrids. To ensure all investor all over the country equal access through an appropiate

communication network. To provide a fair, efficient, and transparent securities market to investors through an

electronic trading system. To enable shorter settlement cycles and book entry settlement system.

To meet the current international standards of securities markets.

The exchange is professionally managed in that the ownership and managemet of the NSE arecompletely separated from the rightto trade on the exchange. In order to upgrade theprofessional standards of the market intermediaries, the exchange lays stress on factors such as

capital adequacy, corporate structure, track record, and educational experience.

Trading at NSE can be classified under two broad categories:

Wholesale debt market and Capital market.

Wholesale debt market operations are similar to money market operations - institutions and

corporate bodies enter into high value transactions in financial instruments such as governmentsecurities, treasury bills, public sector unit bonds, commercial paper, certificate of deposit, etc.

There are two kinds of players in NSE:

Trading members and Participants.

Recognized members of NSE are called trading members who trade on behalf of themselves

and their clients. Participants include trading members and large players like banks who takedirect settlement responsibility.

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Trading at NSE takes place through a fully automated screen-based trading mechanism whichadopts the principle of an order-driven market. Trading members can stay at their offices andexecute the trading, since they are linked through a communication network. The prices atwhich the buyer and seller are willing to transact will appear on the screen. When the pricesmatch the transaction will be completed and a confirmation slip will be printed at the office of

the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

NSE brings an integrated stock market trading network across the nation. Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to thesecurities.

Delays in communication, late payments and the malpractice¶s prevailing in thetraditional trading mechanism can be done away with greater operational efficiencyand informational transparency in the stock market operations, with the support of

total computerized network.

Unless stock markets provide professionalised service, small investors and foreign investorswill not be interested in capital market operations. And capital market being one of the major sources of long-term finance for industrial projects, India cannot afford to damage the capitalmarket path. In this regard NSE gains vital importance in the Indian capital market system.

N SE Milestones

November 1992 y Incorporation.

April 1993 y Recognition as a stock exchange.

May 1993 y Formulation of business plan.

June 1994 y Wholesale Debt Market segment goes live.

November 1994 y Capital Market (Equities) segment goes live.

April 1995 y Establishment of NSCCL, the first Clearing Corporation.

June 1995y Introduction of centralised insurance cover for all trading

members.

July 1995y Establishment of Investor Protection Fund.

October 1995 y Became largest stock exchange in the country.

April 1996 y Commencement of clearing and settlement by NSCCL.

April 1996 y Launch of S&P CNX Nifty.

June 1996 y Establishment of Settlement Guarantee Fund.

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November 1996y Setting up of National Securities Depository Limited, first

depository in India, co-promoted by NSE.

November 1996 y Best IT Usage award by Computer Society of India.

December 1996 y Commencement of trading/settlement in dematerialisedsecurities.

December 1996 y Dataquest award for Top IT User.

December 1996 y Launch of CNX Nifty Junior.

February 1997 y Regional clearing facility goes live.

November 1997 y Best IT Usage award by Computer Society of India.

May 1998y Promotion of joint venture, India Index Services &

Products Limited (IISL).

May 1998y Launch of NSE's Web-site: www.nse.co.in.

July 1998y Launch of NSE's Certification Programme in Financial

Market.

August 1998 y CYBER CORPORATE OF THE YEAR 1998 award.

February 1999y Launch of Automated Lending and Borrowing

Mechanism.

October 1999 y Setting up of NSE.IT.

January 2000 y Launch of NSE Research Initiative.

February 2000 y Commencement of Internet Trading.

June 2000 y Commencement of Derivatives Trading (Index Futures).

September 2000 y Launch of 'Zero Coupon Yield Curve'.

November 2000y Launch of Broker Plaza by Dotex International, a joint

venture between NSE.IT Ltd. and i-flex Solutions Ltd.

December 2000 y Commencement of WAP trading.

June 2001 y Commencement of trading in Index Options.

July 2001y Commencement of trading in Options on Individual

Securities.

November 2001y Commencement of trading in Futures on Individual

Securities.

December 2001 y Launch of NSE VaR for Government Securities.

January 2002 y Launch of Exchange Traded Funds (ETFs).

May 2002 y NSE wins the Wharton-Infosys Business Transformation

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Award in the Organization-wide Transformation category.

October 2002 y Launch of NSE Government Securities Index.

January 2003 y Commencement of trading in Retail Debt Market .

June 2003 y Launch of Interest Rate Futures.

August 2003 y Launch of Futures & options in CNXIT Index .

June 2004 y Launch of STP Interoperability.

August 2004 y Launch of NSE¶s electronic interface for listed companies.

March 2005y µIndia Innovation Award¶ by EMPI Business School, New

Delhi.

June 2005 y Launch of Futures & options in BANK Nifty Index.

December 2006 y 'Derivative Exchange of the Year', by Asia Risk magazine.

January 2007 y Launch of NSE ± CNBC TV 18 media centre.

March 2007 y NSE, CRISIL announce launch of IndiaBondWatch.com

June 2007 y NSE launches derivatives on Nifty Junior & CNX 100.

October 2007 y NSE launches derivatives on Nifty Midcap 50.

January 2008y Introduction of Mini Nifty derivative contracts on 1st

January 2008.

March 2008y Introduction of long term option contracts on S&P CNX

Nifty Index.

April 2008 y Launch of India VIX.

August 2008 y Launch of Currency Derivatives.

Index-based Market-wide Circuit Breakers:

An index based market-wide circuit breaker system applies at three stages of the indexmovement either way at 10%, 15% and 20%. These circuit breakers bring about a coordinatedtrading halt in trading on all equity and equity derivatives markets across the country. The

breakers are triggered by movements in either Nifty 50 or Sensex, whichever is breachedearlier.

In case of a 10% movement in either of these indices, there would be a one-hour markethalt if the movement takes place before 1:00 p.m. In case the movement takes place ator after 1:00 p.m. but before 2:30 p.m. there would be trading halt for ½ hour. In casemovement takes place at or after 2:30 p.m. there will be no trading halt at the 10% leveland market would continue trading.

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2003 2004 2005 2006 2007 2008 Jul-09

3089337183

4166340589

71486

52998

36169

FIIs inflows (R s. In crore)

In case of a 15% movement of either index, there should be a two-hour halt if the

movement takes place before 1 p.m. If the 15% tr igger is reached on or af ter 1:00 p.m.

but before 2:00 p.m., there should be a one-hour halt. If the 15% tr igger is reached on or

af ter 2:00 p.m. the trading should halt for remainder of the day.

In case of a 20% movement of the index, trading should be halted for the remainder of

the day.

5.9 FOR E GN INSTIT TIONAL INVESTMENTS AND THE INDIAN STOCK

MARK ET:

An impor tant feature of the 1990s was the par ticipation of FIIs in the stock market.FIIs was

allowed to par ticipate in the Indian stock Market in September 1992. They have become activeinvestors since August 1993. As of 31st July, 2009, there are 1,679 FIIs registered with SEBI.

FIIs Flows:

From the graph, we can see the

substantial increase in FIIs

investment dur ing the yearsbetween 2000 and 2006. FII

investment in India has come inwaves. The f irst wave of FII

came in 1993-94 when thestock markets were opened up

for foreign investors. FII net f low touched R s. 6,791 crore in2000. Then a large number of FIIs arr ived with µemerging

market funds in 2000-01

wherein theF

II net investment touched a high of R s. 13,084

crore. However, the FII fund

f low declined tremendously inthe year 2002. It came down to R s. 3,555 crore. The major reasons for the decline in their investment were the dismal performance of the Indian stock market and the slow pace of

reforms.The third wave which came in 2003 brought in new FIIs such as Hedge funds,

university funds and development market funds to encash India¶s growth story. The net FII

inf low touched a record R s. 30,893 crore in 2003 and R s. 37,183 crore in 2004 with most of the

investment in promising mid-cap stocks. Since 2004, a rally in mid-cap shares raised the

market capitalisation ratio thereby benef itting FIIs and increasing their interest in Indian stock.

This increased investment was on the account of strong macro-economic fundamentals,

abolition of long-term capital gains tax, etc.

Most FIIs took advantage of depressed pr ices increased their stakes in frontline Sensex stocks

such as Infosys, HLL, R eliance, ITC, etc. FIIs increase their activity whenever there isdownturn in the stock market. They identif ied and picked up the old economy Indian

companies which were being traded at a discount and actively bought those shares.

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Sectoral Holding of FIIs:

Structural Reforms and Impact of FIIs on the Capital Market:

India has been in the forefront of utili ing technology to enhance its stock market performance.Both the stock exchanges¶ (BSE and NSE) web sites provide a real-time update of var ious

indices, streaming quotes of stocks, the news updates, screen-based order matching system.

Fur ther reforms on practices like rolling settlements, trade guarantee, demat settlement and

der ivative trading have cer tainly added depth (volume of a par ticular stock) and breadth(number of stocks traded) to the market.

Change in the Pattern of E uity Holding of SensexListed Companies:

Equity Holding Pattern of Sensex Companies(In percentage) %

Promoters

Share

Institutional

Investor Share

Mutual

Fund &

UTI share

Banks, FIs,

Insurance

cos share

FIIs

share

Others

March

-0532.42 35.81 6.67 11.62 17.52 31.77

March

± 0631.66 35.84 5.38 13.91 16.55 32.50

March

± 0734.49 36.54 4.46 10.27 21.63 28.97

March

± 08

38.28 35.88 3.46 9.67 22.75 25.84

Source: CMIE Prowees Database

The growing signif icance of FIIs in the stock market can be observed from the share of FIIs in

the equity holding of the Sensex companies, which has increased from 17.52% in March 2005to 22.75% in March 2008. On the other hand, the domestic institutions have continuously

divested their share over the same per iod. Despite the increase in the share of FIIs the

21%

20%

20%

8%

7%

7%

6%

6%

3% 2%

Financial Services

IT

EnergyConsumer Goods

HealS

T Care

MaU

erials

FMCG

IndusU

rials

US

iliS

ies

Telecom

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combined share of the domestic institutions exceeds that of FIIs holding. Hence the FIIs alonecannot be squarely blamed for the destabilizing developments in the Sensex. The magnitudeand the duration of FIIs involvement in the stock market has definitely created opportunitiesand scope for the domestic players to grow to strength in terms of depth and breadth.

The total proportion of households investing in equities or in mutual funds has been around9%. Indian institutions of long-term finance like provident and pension funds do not invest inequities. This is on account of the prevailing legislation as well as the opposition of workmento equity investments. While insurance companies do invest a portion of their funds in equities,the penetration of insurance in India is at a very low level, limiting the availability of funds for equity investments. Thus, a lot of domestic capital is flowing into unproductive uses like goldand in financing the fiscal deficit of the government.

6. Market Trend:

Almost every day in the investing world, we used to hear the terms "bull" and "bear" to

describe market conditions. As common as these terms are, however, defining andunderstanding what they mean is not so easy. Because the direction of the market is a major force affecting one¶s portfolio, it's important to know exactly what the terms bull and bear market actually signify, how they are characterized and how each affects.

Bull and Bear- these two terms are constantly buzzing around the investing world. At the same

time, because the market is determined by investors' attitudes, these terms also denote howinvestors feel about the market and the ensuing trend.

Simply put, a bull market refers to a market that is on the rise. It is typified by a sustained

increase in market share prices. In such times, investors have faith that the uptrend willcontinue in the long term. Typically, the country's economy is strong and employment levelsare high.

On the other hand, a bear market is one that is in decline. Share prices are continuouslydropping, resulting in a downward trend that investors believe will continue in the long run,which, in turn, perpetuates the spiral. During a bear market, the economy will typically slowdown and unemployment will rise as companies begin lying off workers.

Where Did the Terms Come from?

The origins of the terms "bull" and "bear" are unclear, but here are two of the most common

explanations:

1. The bear and bull markets are named after the way in which each animal attacks itsvictims. It is characteristic of the bull to drive its horns up into the air, while a bear, on

the other hand, like the market that bears its name, will swipe its paws downward uponits unfortunate prey. Furthermore, bears and bulls were literally once fierce opponents

when it was popular to put bulls and bears into the arena for a fight match. Matchesusing bulls and bears (whether together or gains other animals) took place in theElizabethan era in London and were also a popular spectator sport in ancient Rome.

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2. Historically, the middlemen who were involved in the sale of bearskins would sell skinsthat they had not yet received and, as such, these middlemen were the first short sellers.After promising their customers to deliver the paid-for bearskins, these middlemenwould hope that the near-future purchase price of the skins from the trappers woulddecrease from the current market price. If the decrease occurred, the middlemen would

make a personal profit from the spread between the price for which they had sold theskins and the price at which they later bought the skins from the trappers. Thesemiddlemen became known as bears, short for "bearskin jobbers", and the term stuck for describing a person who expects or hopes for a decrease in the market.

Characteristics of a Bull and Bear Market:

Although we know that a bull or bear market condition is marked by the direction of stock

prices, there are some accompanying characteristics of the bull and bear markets that investorsshould be aware of. These can be mentioned as below:

Supply and Demand for Securities- In a bull market, we see strong demand and weak supply for securities. In other words, many investors are wishing to buy securities whilefew are willing to sell. As a result, share prices will rise as investors compete to obtainavailable equity. In a bear market, the opposite is true as more people are looking to sellthan buy. The demand is significantly lower than supply and, as a result, share pricesdrop.

I nvestor Psychology - Because the market's behavior is impacted and determined by

how individuals perceive that behavior, investor psychology and sentiment arefundamental to whether the market will rise or fall. Stock market performance and

investor psychology are mutually dependent. In a bull market, most everyone isinterested in the market, willingly participating in the hope of obtaining a profit. During

a bear market, on the other hand, market sentiment is negative as investors arebeginning to move their money out of equities and into fixed-income securities untilthere is a positive move. In sum, the decline in stock market prices shakes investor confidence, which causes investors to keep their money out of the market - which, inturn, causes the decline in the stock market.

C hange in Economic Activity - Because the businesses whose stocks are trading on the

exchanges are the participants of the greater economy, the stock market and the

economy are strongly connected. A bear market is associated with a weak economy as

most businesses are unable to record huge profits because consumers are not spending

nearly enough. This decline in profits, of course, directly affects the way the market

values stocks. In a bull market, the reverse occurs as people have more money to spend

and are willing to spend it, which, in turn, drives and strengthens the economy.

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6.1 BULL MARKET:

Definition: A prolonged period in which investment prices rise faster than their historical

average.

A bull market refers to when the prices of stocks have gone up steadily over an extended timeperiod. A bull market means a market that is going up instead of down. Normally during a bullmarket, the economy of the country is stable and strong, and unemployment is low. Theassumption by the investors is usually that the market will continue the upward swing. Theopposite of a bull market is a bear market. A bull market can be described by somecharacteristics that occur, and investors should watch these characteristics closely to determinewhat trades to make. It is a financial market of a group of securities in which prices are risingor are expected to rise. The term "bull market" is most often used to refer to the stock market,but can be applied to anything that is traded, such as bonds, currencies and commodities.

A bull market tends to be associated with increasing investor confidence, motivating investors

to buy in anticipation of future price increases and future capital gains. In describing financialmarket behavior, the largest group of market participants is often referred to, metaphorically, asa herd. This is especially relevant to participants in bull markets since bulls are herdinganimals. A bull market is also sometimes described as a bull run.

Bull markets can happen as a result of an economic recovery, an economic boom, or investor psychology. The longest and most famous bull market is the one that began in the early 1990sin which the U.S. equity markets grew at their fastest pace ever. In simple, bull-market refers toa financial market of a group of securities in which prices are rising or are expected to rise. Theterm "bull market" is most often used to refer to the stock market, but can be applied toanything that is traded, such as bonds, currencies and commodities. Bull markets arecharacterized by optimism, investor¶s confidence and expectations that strong results will

continue.

Why is it called a Bull Market?

The term "bull" is used to describe the market, because bulls attack by pushing their horns out

and up. Hence the thrusting motion up resembles the upward move of the markets. Also, when

bulls run together, they do so without looking back and go full steam ahead. This is also the

mentality of the markets as traders and speculators trip over themselves attempting to jump on

the band wagon for quick gains.

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Features of Bull market:

A bull market is not simply stocks that are on the rise in price. There are some other factors thatcan affect the type of market and how trades are being done as well, and this is also true in a

bear market or any other market type.

One of these factors is the level of supply and demand for securities for trading . Abull market will exhibit signs of a strong demand for securities against a weak supplyfor them. Many traders and investors want to purchase securities, but most traders andinvestors do not want to sell, and this will cause the market price to go up in response.Because investors want securities but they are in short supply, the investors are willingto pay a higher price for them, and this is what causes the stock price to rise.

Another factor concerning a bull market is the psychology involved. The psychology of the investors is an important factor, because the behavior of the market is based in parton the behavior and mindset of the investors. The performance of the stock market andthe psychology of the investors are dependent on each other, and the thoughts and fears

of investors will determine whether the market goes up or down. This is a fundamentalprinciple, and the psychology of investors will determine how the market reacts.

During a bull market investors want to buy, because the price is going up, and investorsare confident that buying stock can be profitable if this trend continues. A bull marketmeans plenty of investors trying to buy and share in the wealth in the hopes that themarket prices continue to rise. Investors will pull money out of fixed income securitiesthat pay less, and invest in the stock market instead.

Another factor that plays a part in a bull market, or any market fluctuations and tradingactivities, is the economic activity. There is a very strong link between the economyand the stock market. Businesses are the base for the stocks that are traded on themarket, and the economy has a huge effect on these businesses.

In a bull market, the economy is strong and stable, and economic growth and activity

are high. Consumer spending is high, because people have extra money, and thisstrengthens the economy and raises the market price of the stocks. This is becausebusinesses are making profits and can afford to expand, leading to even more potentialprofits.

A bull market can be risky, however, because eventually what goes up must comedown, and the volume of trading in a bull market is high. This can have an effect knownas the bubble effect, because stocks rise so high they become overvalued, andeventually the bubble will burst and the market can collapse swiftly.

Apart from the above noted points, there are another five major characterstics of Bull Market.

Economic Growth: Clearly the economy matters a whole lot to the stock market. If weare in a period of consistent economic growth there is good chance we will either be ina Bull market, or one will be starting shortly. The whole basis of how a stock is valuedis based on how well a company doing economically, so while some companies may dobetter than others in a strong economy the market as a whole should be very strong.

Less Volatility: Volatility tends to be a friend of a bear market and lack of volatilitytends to lead to higher prices. If we step back and watch the market we¶ll notice that in

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a down market the daily swings tend to be much larger than in an up market. In a Bullmarket, things are more stable and under control and the gains are generally small andsteady.

Reasonably Amount of certainty: Uncertainity is one of the biggest allies of Bear market and one of the biggest enemies of Bull Market. As long as market participant

can feel pretty comfortable that estimates at blue chip companies are accurate andeconomists forecasts are pretty much in line then the market typically behaves well.

Strong Market Breadth: During a bull market there is strength throughout manymarket sectors. Typically the volume to the upside will be much stronger than that tothe downwards. In a bear market rally the move is typically from a smaller number of stocks and breadth isn¶t so strong.

Strong corporate Balance sheets: It is very important to have a large amount of companies with strong corporate balance sheets. Strong Balance sheets also rewardinvestors with a nice dividend, which is always a good perk.

Existence Period of Bull market:

No bull market can continue to exist for a very long period, as the prices can¶t raise infinitly.After a certain point prices has to go down. The Bull markets lasts generally for a few monthsand in these months high volume of trading takes place in bull markets. In the Bull market, Bullis the investor who expects price level to rise and buys a type of security or commodity in hopeof earning high profit by reselling it in the future when the price rise will takes place.

Factor responsible for Bull Market:

There has been a sharp rise in the index in the last year as the sensex moved from a level of 15000 to 20000 in just four months. Again SENSEX, was in a bull run for almost five yearsfrom April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable and recent bull market was in the 1990s when the U.S. and many other global financialmarkets rose rapidly.

The following were the main reasons for this sudden rise of sensex.

Higher GDP Growth: The Indian economy is rising in full swing. The Gross Domestic

Product (GDP) growth for last two years was over 8% and 9% respectively. It was expected to

rise at the rate of 8.5% over next couple of years. Corporate revenues had notched a 30-plus %

rise in revenues for nearly last five years. The domestic retail demand continued to be robust.

All these led to firm belief of investors in the Indian growth story.

Continuous Fund flows: Foreign funds have bought a net 16.2 billlion dollars into the boursestill October 10, 2007. This is on the back of investment of over $10 billion for 2005 and over

$14 billion for 2007. Over the last few years, Foreign Institutional Investors (FIIs) have been

investing into India very heavily.

Apart from FIIs, even the Non-Residents Indians (NRIs) have been investing highly into the

Indian Equity markets. According to the RBI data, annual inflow of NRI deposits into the

country for the year 2006-07 stood at $3.9billion against $2.8 billion in the year 2005-06.

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About 46% of this money was invested into the shares. According to the recently published

Merril Lynch-Capegemini Asia-Pacific Wealth Report, NRI segment is emerging as a niche

segment in the HNI category. By Dec. 31, 2007 net equity investments of NRIs were to the

tune of Rs. 27500 crores.

Strong Book orders: The order books of Indian companies especially the infrastructure and

related industries have been very strong. The companies like Larsen & Turbo, Punj Loyd,

Simplex Infra, Patel Engineering, etc, have the orders worth up to four times their current

annual sales. This has led to higher confidence of investors into these industries.

Commitment to reform: Despite the pressures from its Left allies, the UPA Government at

the centre has shown its commitment towards reforms. Steps taken to stick to fiscal targets,

opening up of the retails sector and aviation sectors to foreign investment, etc. have boosted the

confidence of foreign investors in the Indian economy. The government has also stepped up its

efforts in the direction of divestment and privatisation.

Bulky Forex Reserves: The Forex reserve of India is ballooning. It has already crossed the

mark of $250 billion and is heading towards achieving the feat of $300 billion. This promoted

the International Credit Rating agencies to upgrade India¶s credit rating in foreign currency.

Stable Government: The determinant of growth for an economy is to have an efficient and

stable government that really works. There should be continuity in political sphere because if

public policies go on changing more frequently, economic progress cannot continue, rather

private and public investment will be discouraged. So, the existence of UPA government for

second consecutive time is creating favourable condition for the Indian Stock market.

Other factors:Apart from the above-noted factors, there are some important factors. These

may include high GDP growth rate, Good crops, Good rainfall, Better demand, Stability in

International market, higher cash flow, etc.

Bull Market Strategy:

In a bull market, the ideal thing for an investor to do is take advantage of rising prices by

buying early in the trend and then selling them when they have reached their peak. (Of course,

determining exactly when the bottom and the peak will occur is impossible.) On the whole,

when investors have a tendency to believe that the market will rise (thus being bullish), they are

more likely to make profits in a bull market. As prices are on the rise, any losses should be

minor and temporary. During the bull market, an investor can actively and confidently invest inmore equity with a higher probability of making a return.

So, to gain highest level of profits an investor in the bull market should buy early in the upwardtrend of prices and should sell when the price level reaches the peak. But, it is really tough toguess the peak of price level, after which the prices will fall. Though, it is more likely for theinvestors to earn more profits rather than suffering from loss in a Bull market as are on the rise.Even if there are losses they are oviously negligible and temporary. In a Bull Market, more

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volume of investment raises the chances of good returns. And, a good understnding of long-term market trend can take the level of returns to a new high.

There is no sure way to predict market trends, so investors should invest their money based onthe quality of the investments. At the same time, however, one should have an understanding of

long-term market trends from a historical perspective. Because, both bear and bull markets willhave a large influence over investments. So, one should take time to determine what the marketis doing when making an investment decision. However, in the long term, the market hasposted a positive return.

6.2 BEAR MARKET:

Bear market refers to a prolonged period in which investment prices fall, accompanied bywidespread pessimism. If the period of falling stock prices is short and immediately follows aperiod of rising stock prices, it is instead called a correction. Bear markets usually occur whenthe economy is in a recession and unemployment is high, or when inflation is rising quickly.The most famous bear market in U.S. history was the Great Depression of the 1930s.

The term Bear Market refers to a declining or poor state of the market or trading group, usuallya stock market, in which consumer confidence and financial expectations are on a decline andthe market continues to lose value, usually at an average loss of 15% to 20% in one or moreindex over a 12 month period.

Bear Markets get their name from the fighting techniques of bears. When in danger, bears willstand on the hind legs and swipe down with their front paws. This downward movement is usedas a metaphor for the market trends. In addition, like the fast pace of the bear's swing, bear markets traditionally define periods of time in which there is a substantial decline in stock

values. Unlike Corrections that occur over short periods of time, however, bear markets arelonger-lived with a greater loss.

Investors usually sell large quantities of shares during bear markets, contributing to the risingpessimism and fear that accompanies large downturns in the stock indexes. These types of scenarios usually perpetuate the decreasing value of stocks, causing more fear and even moresales. Historically, bear markets have been the cause of major economic problems such as the1929 Wall Street Crash and the energy crisisin the 1970s.

Some Bear Market Investing Strategies:

It goes without saying that the skills required to make money in the stock market are very

different depending upon whether the market is rising or falling.

These strategies include:-

Flight to safety. If markets are choppy and volatile and the general trend is downwards,why be in the market? Why not, instead, sell a worthwhile percentage of holdings andmove the money into either cash or bonds (medium and long term government or

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corporate debt). As and when the market seems to have settled, and hopefully, there issome value to be found, assets can be repurchased.

Buy defensive assets. In every phase of the business cycle, there are some assets whichrise in price whilst others are falling. This is also the case in the stock market. Somesectors will rise whilst the market generally is falling. It is therefore possible to stay in

the market and make returns. Buy units in a 'bear fund'. Some mutual funds are designed with downward market

movements in mind. These funds often show very poor returns as the stock marketrises. In long bull runs, ownership of these funds can be justified as portfoliodiversification, but is more likely to be very costly!

Trade in the market. An agressive bear market investing strategy is to actively profitfrom the price falls. Historically, this is known as "short selling" or "going short". Theprocess essentially involves the trader selling shares which they do not actually own.The hope is that when settlement day comes, the shares can be bought back in themarket at a lower price and the trader will make a profit from the difference in prices.

In a bear market, however, the chance of losses is greater because prices are continually losingvalue and the end is not often in sight. Even if you do decide to invest with the hope of an

upturn, you are likely to take a loss before any turnaround occurs. Thus, most of the

profitability will be found in short selling or safer investments such as fixed-income securities.

An investor may also turn to defensive stocks, whose performances are only minimally affected

by changing trends in the market and are therefore stable in both economic gloom and boom.

These are industries such as utilities, which are often owned by the government and are

necessities that people buy regardless of the economic condition.

Factors Responsible For Bear Market:

The bear market is the interval in the capital market characterized by falling prices for securities. It is a period when most of the prognosis of stockbrokers and experts are thrown into

winds and are torn into shreds. We should remember that there will always be a bull and bear

market as long as the forces of demand and supply continue in the capital market. Some major

factors responsible for Bear market are explained below:

Massive profit taking:

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

Active and prolong primary market activities:

The primary market is the other half of the secondary market, both markets function indiverse ways. The primary market is where the vast majority of investors do business,the reason is not farfetched; it is an all comers market. For this reason whenever there is

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prolong activities in the primary market, in other word, if there are so many initialpublic offerings and private offerings, investors will channel their funds to the primary,sometimes they may even withdraw their funds, the effect there will be more sellers inthe secondary in the secondary market than buyers, supply will outperform demandthereby driving down the prices of shares.

Massive panic selling by emotion driven investors:

One of the feature of a bearish a bearish market, is the reaction of emotion andsentiment driven investors. The bearish season over the years from my experienceanalyzing and trading stocks have always beaten uninformed investors who have notimbibe the entry and exit strategy that I know has most of the time protected wise andseasoned stock traders. When the vast majority observes that the prices of stocks arerallying down they react by selling off their which affects the stability of the secondarymarket.

Subprime Crisis:

It all started with the subprime crisis in the U.S. When the housing market was boomingin the U.S, banks sold housing loans to those who were undeserving, generally knownas subprime borrowers, at higher interest rates. When the housing markets declined inthe U.S., the defaults from such borrowers started increasing and the lending institutionswere facing huge losses. This loss is estimated to over $100 billion. A couple of companies have also filed for bankruptcy due to heavy losses. Through, it does not haveany direct impact on the Indian market, it affected indirectly. As many of these lendershave also invested in the Indian markets, they started selling their shares in order tomaintain liquidity and keep their companies running.

Higher Sustained Oil prices:

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

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T V

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42

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25 BSE Sensex Coefficient of

variation

S & P CNX Nifth

Coefficient

of variation

7. Voli

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ilip

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Volatility of a stock measures the frequency with which changes in its market pr ice take place

over a per iod of time. Again, volatility in the market is a function of information,

misinformation and sometimes lack of information. In other words, Stock market volatilityindicates the degree of pr ice var iation between the share pr ices dur ing a par ticular per iod. A

cer tain degree of market volatility is unavoidable, even desirable, as the stock pr ice f luctuation

indicates changing values across economic activities and it facilitates better resource allocation.But frequent and wide stock market var iations cause uncer tainty about the value of an asset and

affect the conf idence of the investor. The r isk averse and the r isk neutral investors maywithdraw from a market at sharp pr ice movements. Extreme volatility disrupts the smoothfunctioning of the stock market.

Inter±day Volatility: The var iation in share pr ice return between the two trading days is called

inter±day volatility. Standard deviation is used to calculate inter±day volatility.

Intra±day Volatility: The var iation in share pr ice return within the trading day is called intra± day volatility. It indicates how the indices and shares behave in a par ticular day.

Return: R eturn is the motivating factor that induces the investors to invest money in shares.

R eturn means the prof it earned as a result of r ise in share pr ices. R eturn helps the investor tocompare the benef its available in the alternative investment avenue.

Volatility in Share prices:

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Year wise descriptive statistics for Nifty and Sensex:

TABLE 1

Year Name of the

indices

Minimum index

level

Maximum index

level

Daily average

return

1998-1999 Nifty 808.7 1212.75 0.0029%

Sensex 2764.16 4280.96 0.1163%

1999-2000 Nifty 931 1756 0.1561%

Sensex 3245.27 5933.56 0.1411%

2000-2001 Nifty 1124.7 1624.65 -0.0944%

Sensex 3540.65 5541.54 -0.1379%

2001-2002 Nifty 854.2 1198.45 0.0032%

Sensex 2600.12 3742.07 -0.0113%

2002-2003 Nifty 922.7 1146.5 -0.0524%

Sensex 2834.41 3512.55 -0.0557%2003-2004 Nifty 924.3 1982.15 0.2444%

Sensex 2924.03 6194.11 0.2383%

2004-2005 Nifty 1388.75 2168.95 0.0681%

Sensex 4505.16 6915.09 0.0492%

2005-2006 Nifty 1902.5 3418.95 0.2075%

Sensex 6134.86 11307.04 0.2158%

2006-2007 Nifty 2632.8 4224.25 0.0466%

Sensex 8929.44 14652.09 0.0500%

2007-2008 Nifty 3633.6 6287.85 0.0853%

Sensex 12455.37 20873.33 0.0919%

Analysis:

The daily average return of the Nifty and the Sensex in the year 1998±99 was 0.00294 per centand -0.02482 per cent respectively. The Nifty had positive return whereas the Sensex had

negative return. The pressure of economic sanctions following detonation of nuclear service,woes of East Asian financial markets, volatility of Indian currency and the redemption

pressures faced by the Unit Trust of India (UTI) in respect of its US±64 Scheme made the Niftydecline from 1212.75 in April, 1998 to 808.7 in October, 1998 and the Senses from 4280.96 to2764.16.

In the year 1999±2000, the Nifty and the Sensex return increased from 0.00294 percent to0.15606 per cent and -0.02482 per cent to 0.14112 percent respectively. The union budget of 1999, strength of the Government and also its commitment towards second generation reformsimproved macro economic parameters and better corporate results raised the return. In this year the growth rate of GDP and industrial sector was 6.4 per cent and 6.6 per cent respectively andwithin industrial sector, the growth rate of manufacturing sector was 7.3 per cent.

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The trend got reversed during 2000±2001.The Indian economy decelerated and the Nifty andthe Sensex yielded negative return of ±0.09435 per cent and -0.13788 per cent respectively.There was a large sell off in new economy stocks in global markets. This brought down theNifty from the height of 1636.95 in April, 2000 to the lower level of 1108.20 in October, 2000and the Sensex from 5426.82 in April, 2000 to 3689.43 in October, 2000. The growth rate of

GDP and the industrial sector declined from 6.4 per cent to 6 per cent and from 6.6 per cent to4.9 per cent respectively. Within the industrial sector, the growth rate of manufacturing sector declined to 5.2 per cent and the infrastructure sector also registered a lower growth ascompared to that of the previous year.

Scams have over and again proved the vulnerability of the regulatory network and system of the finance and capital markets in this year. Ketan Parek scam in the stock market resulted in abig default in Calcutta Stock Exchange, the BSE and the NSE. Several stockbrokers grosslymisused the badla finance given to them by investors. FIIs investment was very low in thatyear. The above cited reasons were the major reasons for the negative returns.

The year 2001±02 recorded positive return of 0.00317 per cent but Sensex had negative returnof -0.01129 per cent. The introduction of rolling settlement and derivatives encouraged FIIsand domestic investment even though markets were affected by riots in Gujarat, cyclone inOrisa, suspension of repurchase facility under UTI¶s US 64 scheme and the attack of Worldtrade Center, Indian Parliament and Jammu and Kashmir Assembly.

The daily average return in the Nifty and the Sensex was the highest in the year 2003±04.Strong economic fundamentals exhibited in the fall in interest rates, strong GDP growth rate,increase in foreignexchange reserves and exports of Indian companies doubled the Nifty andthe Sensex in the first three quarters. Further, the large expenditure by the Government oninfrastructure sector and the reform process enhanced the morale and motivation levels of Corporate India which in turn boosted the stock market returns.

There was a decline in the return in the year 2004±2005. As the index value of the Niftysharply came down from 1892.45 and 5925.58 respectively on 23rd April 2004, to 1388.75 and4505.16 respectively in May, 2004, a lower circuit breaker was applied on the NSE for the firsttime. This brought a total halt to all trading and the fund flow to stock market from the retailinvestors and the Foreign Institutional Investors dwindled. Slow down in Chinese economy, taxexemption on long term capital gain, and tax reduction on short term gain, the appreciation of rupee against the US dollar, low returns of bank FD rate and insurance policies and negativereturns of debt market mutual funds prevented the negative return. The over all performance of the stock markets in the world was well. By 2005, India¶s growth story was well established.Money started pouring in from everywhere. A new industrial resurgence; a pick up ininvestment; modest inflation in spite of spiraling global crude prices; rapid growth in exports

and imports with a widening of the current account deficit; laying of some institutionalfoundations for faster development of physical infrastructure; progress in fiscal consolidation;and the launching of the National Rural Employment Guarantee (NREG) Scheme for inclusivegrowth and social security increased the return in the year 2005-2006. All these factors boostthe Indian stock market scaled high. Two things have happened in this period to push themarket to uncharted territory. One is a robust inflow of foreign money, as more and more FIIshave rushed to pump money into the Indian market. What is new about these inflows is thedecisive move made by Japanese funds to look at India as an alternative to China, the bulk of

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the $ 1.9 billion that has flowed into Indian markets in July alone has come from Japanese FIIs,taking the total FII investments in 2005 to around $7 billion. The number of new FIIs registeredduring the year has also gone up significantly.

Again there was a decline in the market return in the year 2006-2007. Global crude oil priceswere surging yet again and had touched $78 a barrel due to the tensions in West Asia and thehurricanes from the Atlantic into the US east coast of the year further surged in crude pricesand oil production and refinery output were disrupted in the affected area. Global liquidity hadalmost been drained off following the rate increases in the US, Europe and in Japan. FII flowsin 2006, at about $8.5 billion (around Rs 38,000 crore), were lower by 20 per cent than in 2005.

RETURNS IN BULL PHASE AND BEAR PHASE:

Ups and downs in the share prices are quite natural in stock market. The bull and the bear

markets have certain characteristics and the investors adopt different strategies in the bull andthe bear markets. The rise and the fall of shares are linked to a number of conditions such aspolitical climate, economic cycle, economic growth, international trends, budget, generalbusiness conditions, company profits, product demand etc. In the bull market, buy±holdapproach is adopted and in the bear market sell±move out approach is adopted by the investors.Results of return during the bull and the bear phases are presented in the Appendix: Table 2.

Analysis:

The durations of the bull and the bear phases are more or less similar for the stocks of the Niftyand Sensex. In the bear phase±A, they had negative return of ±0.22900 per cent and ±0.25564

per cent respectively. Nuclear tests conducted in May, 1998 and imposition of economicsanctions by the US, Japan and other industrialized countries resulted in uncertainty in theIndian stock market. In the bear phase, the FIIs net investment was negative and they were netsellers except in July and September 1998.

The growth in macro economic factors like GDP, industrial sector and manufacturing sector turned out to be positive with good corporate results. FIIs average monthly investment was

Rs.52.41 crore in the bull phase. This moved the Nifty and Sensex to newer peaks. There was ahike in the Nifty and the Sensex index level from December, 1998 to February, 2000.

The bear phase±B lasted for more than one and a half year due to economic and financialturmoil. FIIs average monthly investment during the phase was Rs 43.15 crore which was very

low compared to the investment in the previous bull period. National and international eventslike fall in the growth of GDP, the earth quake in Gujart, Ketan Parek scam, UTI¶s ban onrepurchase facility under US 64 scheme , the proposal to increase the tax on distribution of dividend by companies and MFs from 10 per cent to 20 per cent set the bear phase in motion.

Then the Nifty and the Sensex index oscillated back and forth from 869.05 to 1193.05 fromSeptember, 2001 to April, 2003 and 2600.12 to 3712.74 from September, 2001 to March 2003

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respectively. The net inflows of FIIs declined from Rs.87552 mn in 2001±2002 to Rs.26889 mnin 2002 ± 2003. FIIs were net sellers in the month of June and October, 2002.

The Nifty and Sensex experienced a steady upward movement from April 2003 to January2004. About 83 per cent of the NSE stocks were up in the bull phase. In the mid 2003, India

was one of the preferred FIIs destinations in Asia compared to Korea and Taiwan.Liberalization in EXIM policy, monetary policy and mini±budget, rapid growth in theeconomy, superior return on equity (ROE) vis-à-vis other market in the region, low volatility inROE, a strong financial system, a robust corporate performance and the strong risk adjustedreturn of the Indian market attracted many foreign investors to India.

The busy bull market turned into bear market for a very short duration. All the indices sawcontinuous and substantial fall from January, 2004 to May, 2004. Many reasons can be citedfor this fall. The ban on Participatory Notes made FIIs to sell and the banks that did marginfunding against shares also started selling. Retail investors and HNIs transferred some portionof their holdings in equities to bullion market because the price of gold increased to Rs.6360

per 10 gm on 7th January, 2004 and the silver increased to Rs10, 610 a kg on 2nd March, 2004.On 14th May 2004 the value of the Nifty plunged deeply from 1582.4 to 1388.75 on 17th May2004, and the circuit breaker was applied on the Nifty for the first time. The prospect of a non-BJP government in the center created a doubt about the reform process in the minds of investors and the brokers, and this affected the sentiment of the domestic investors.

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

stock market in its peak with its ups and downs.

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8. Findings:

Factors responsible for Volatility:

Indian stocks are found to be highly volatile. Volatility is caused by a number of factors such asspeculation, the trading and settlement system, the government, inflation, interest rates,announcement of corporate results, etc. All these factors directly or indirectly influencemovement in share prices. Apart from these, the factors responsible for high volatility can beexplained as follows:

Inclusion of the new economy stocks, most of which were over-valued in the BSEindex.

Increased influence of international stock indices, espicially the NASDAQ. High speculation when the badla system was prevelent led to large fluctuations in

prices.

Day trading increased which led to wild fluctuations in intra-day prices.

Foreign Institutional Investors (FIIs), exit the markets at the slightest whiff of trouble.This increases volatility in the stock markets. Domestic investors follow FIIs and

emaluate their investment pattern. If, FIIs buy, everyone buys and if FIIs sell, everyonesells.

Indian markets have high volume but they lack depth as the volums are contributed byfew institutional participants. Indian markets lack hedge funds and pension funds,whch can take a long-term view of the markets.

External factors such as world politics and disturbances, the IT revolution, theinformation boom by the business news channels, rising oil prices and apprehensionsof rise in international rates contributed to high volatiliy.

The announcement in the Union Budget 2004-05 regarding imposition of the SecuritiesTransaction Tax (STT) affected the market sentiments adversely.

These factors, in turn, are responsible for the development of the stock market in our country

and making it comparable with the global markets.

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9. Recommendtions:

This kind of volatility and sudden crash of the market is not a good indicator of sound financial

markets. It may affect the confidence of the retail as well as the foreign investors in the Indianmarkets. Therefore, the government needs to look into the situation and take some steps to

strenghten the markets. The following measures are suggested to remove the structual

deficiencies of the market and improve the market mechanism:

There is lack of depth in the market. The fear of FIIs pulling their money out of the

market is always seen as a big threat. To avoid this, more institutional players such as

pension funds are required to invest in the market and provide it the required depth.

There is a need for a robust securities lending and short selling infrastructure. It will

help the long term investors to earn on their investments and provide heterogenerity in

the market.

Securities and Exchange Board of India (SEBI) needs to keep a vigil on the sharp rise inany stock without a reasonable cause. It needs to keep track of the investors in such

companies and trace the source of investment to avoid any type malpractices.

There is inability of the banking system to turn around the funds quickly. When the

Sensex was falling, the banking could not divert the funds to rescue the investors

quickly which led to margin calls and sudden crash of the market.

To control insider trading and manipulation of prices, strict regulatory and punitive

measures should be adopted by the SEBI and stock exchanges.

To stop operations in the unofficial and unregulated grey market, the publication of

unofficial quotation in newspaers and magazines should be declared illegal and sale of

shares before acquisition by buyers should be banned. To avoid confusion among the investors, there should be proper coordination among the

stock exchanges in India. There should not be any overlapping in their areas of

operations.

Investors should take into consideration various things before investing into scripts such

as:

Financial position of the company.

Liquidity position.

Past performance of company.

Brokers should not exceed their trading limit in terms of upper and lower limit.

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10. Conclusion:

The behavior of Stock Market and the prices of stocks depend greatly on the speculation of the

investors. So, over- reactions and wrong speculation can give rise to irrational behavior of theStock Market. Excessive optimistic speculation of future prospects can raise the prices of

stocks to an extreme high and excessive pessimism on the part of the investors can result in

extremely low prices.

So, it is extremely difficult to make predictions about the Stock Market and the inexperiencedinvestors who are not that much interested in financial analysis of stocks; rarely get thefinancial assistance from the Stock Market at the time of need.

The factors influencing the stock market affect the volatility of the market in which they aretraded. These factors, in turn, are responsible for the development of the stock market in anycountry and making it compareable with the global markets. So, stock market development is a

multi-dimensional concept.

Though many of the investors have lost life saving in the recent correction, there is life after thecrash. The Indian growth story is intact with a forecast of over 9% growth for 2009-2010. Theinvestment pipeline is estimated to be Rs.5, 00,000 crores. The government continues to spendheavilty on the infrastructure projects. Domestic demand is still robust. Nevertheless, the Indianstocks will continue to be attractive. Moreover, the fear of recession in the US will force theglobal investors to look for alternative investment destinations and India will be the biggestbeneficiary. The only thing to be kept in mind is that greed always leads to devastations. The

investors should not aim for very high returns as the level of returns is always positivelycorrelated to the level of risk.

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11. Limitations:

A period of 60 days was a very short period to understand the stock market.

The project is based on secondary data collected from other souces magazines,newspaper and websites etc.

Reliability of the sources could also be limitation for the project.

Possibility of error in analysis of data.

The analysis is based on the past performance and does not confirm the future

performance.

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12. References:

Books:

³Indian Financial System´, Second Edition ----- Bharati V. Pathak.

³Capital Markets in the BRIC Economies´ ------ Rituparna Bhattacharya, Anuradha Sen

and Sandip Lahiri Anand.

³Money, Banking & International Trade´ ------- M.L. Jhingan.

Magazines:

Cometition Refresher.

Websites:

www.karvy.com www.bseindia.com

www.nseindia.com

www.investopedia.com

www.sebi.com

www.google.com

www.wikipedia.com

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13. Annexure:

Table 1:

Descriptive Statistics for Various Phases ±Nifty and Sensex

Phase Indices Period Minimum Maximum Daily AverageReturn

BEAR ±A Nifty 21-4-1998

-03-12-98

808.7 1212.75 -0.2290

Sensex 21 -4-1998

-3-12-98

2764.16 4280.96 -0.2556

BULL ±I Nifty 4 ± 12-98-21-02-2000

828.75 1756.00 0.2585

Sensex 04 ± 12-98

-22-02-2000

2849.82 5933.56 0.2587

BEAR ±B Nifty 22-02-2000-21-09-01

854.2 1739.05 -0.1533

Sensex 23-02-2000

-21-09-01

2600.12 5810.17 -0.1778

OSCILLATING Nifty 24-09-2001-

25-04-2003

869.05 1193.05 0.0218

Sensex 24-09-2001

-25-04-2003

2617.35 3712.74 0.0315

BULL ± II Nifty 28-04-2003

-14-01-2004

929.5 1982.15 0.4211

Sensex 28-04-2003-14-01-2004

2936.71 6194.11 0.4205

BEAR ± C Nifty 15-01-2004

-17-05-2004

1388.75 1944.45 -0.3819

Sensex 15-01-2004-17-05-2004

4505.16 6064.10 -0.3432

BULL ± III Nifty 18-05-2004

-31-03-2008

1446.1 6287.85 0.1138

Sensex 18-05-2004

-31-03-2008

4644 20873.0 0.1183

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