Stock Market

STOCK EXCHANGE STOCK EXCHANGE is an organized market place, either corporation or mutual organization, where members of the organization gather to trade company stocks or other securities. Stock Exchange also facilitates for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The trade on an exchange is only by members and stock broker who have a seat on the exchange. Some of the Stock Exchanges are --New York Stock Exchange (NYSE) --National Stock Exchange (NSE) --Bombay Stock Exchange (BSE) --Regional Stock Exchange (RSE) Stock Exchange being a very vast topic, we are focusing on BOMBAY STOCK EXCHANGE (BSE).

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BOMBAY STOCK EXCHANGE (BSE) The Bombay Stock Exchange Limited, (formerly, the Stock Exchange, Mumbai; popularly called as BSE) is the oldest Stock Exchange in Asia with a rich heritage. It is located at Dalal Street, Mumbai, India. BSE was established in 1875 as “The Native Share & Stock Brokers”. It was the first Stock Exchange in the country to obtain permanent recognition in 1956 from The Government of India under The Securities Contracts (Regulation) Act 1956. There are around 3500 Indian companies listed with Stock Exchange and has a significant trading volume. The Exchange is professionally managed under the over all direction of the Board Of Directors. The Board comprises eminent professional, representative of Trading Members and the Managing Directors of the Exchange. The Board is inclusive & is designed to benefit from the participation of market intermediaries. As of July ’05, the market Capitalization of BSE was about Rs.20 Trillion (US $466 Billion). As of 2005, it is among the five biggest Stock Exchanges in the world in terms of transactions volume. Along with NSE, the companies listed on BSE have a combined market Capitalization of US $125.5 Billion.

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NEED FOR BSE BSE is one of the factors Indian Economy depends upon. BSE has played a major role in the development of the country. Through BSE, Foreign Investors have invested in India. Due to inward flow of foreign currency the, the Indian economy have started showing the upward trend towards the development of the country. BSE provides employment for many people. Trading in BSE is also a business for a few, their family income depends on it, that is the reason why when scandals occur in the stock market it not only affects the companies listed but also affects many families. In the few extreme cases, it is observed that the bread winner of a family tends to suicide due to the losses occurred. In most of major industrial cities all over the world, where the businesses were evolving and required investment capital to grow and thrive, stock exchanges acted as the interface between Suppliers and Consumers of capital. One of the key advantages of the stock exchanges is that they are efficient medium for raising resources and channeling savings from the general public by the way of issue of Equity / Debt Capital by joint stock companies which are listed on stock exchanges. Not to forget that the taxes and other statutory charges paid by BSE are substantial and make a sizeable contribution to the Government exchequer (Financial resources; funds). For example, transactions on the stock exchanges are subject to stamp duties, which is paid to the State Government. The annual revenue from this source ranges from Rs 75 – 100 crores With the opening up of the financial markets to Foreign Investors a number of foreign institutional investors and brokers have established a sizeable presence in Mumbai.

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With no doubt we can clearly state without BSE, the Indian Economy would have been a complete different story. Various companies wouldn’t have been a strong and successful as they are today and the brokers and traders would have been elsewhere. BSE is an asset to our country and its existence plays a vital role in many people’s life who depends on it. Indeed, BSE has made a major contribution to the industrial and economic development of India.

FUNCTIONS OF BSE 4

The Stock Market is a pivotal institution in the financial system. A well-ordered stock market performs several economic functions: • • • • •

It ensures the measure of safety and fair dealing It performs an ‘act of magic’ by translating short-term investments into long-term funds for companies. It directs the flow of capital in the most profitable channels. It induces companies to raise their standard of performance. It offers guidance to management about the cost of capital.

Measure of Safety and Fair Dealing: The stock exchanges operate under a regulatory framework which seeks to protect the interest of investors. The rules, regulations, and bye-laws of a stock exchange, which are approved by the central government, are meant to ensure that a reasonable measure of safety is provided to investors and transactions take place in competitive conditions which are fair to all concerned. Act of Magic: Most of the investors are interested in short-term investments. The requirements of companies are, however, long-term in nature—they require equity capital on a more or less permanent basis and debenture capital for 3 to 15 years. Thanks to the negotiability and transferability of securities, through the stock market, it is possible for companies to obtain their long-term requirements from investors with short-term horizons. While one investor is substituted by another when a security is transacted, the company is assured of availability of funds.

Flow of Capital in the Most Profitable Channels:

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Companies which have more profitable investment opportunities are normally able to raise substantial funds through the stock market, whereas companies which do not have such opportunities are normally not able to do so. As a result, the stock market facilitates the direction of the flow of capital in the most profitable channels. Inducement to Companies to Raise their Standard of Performance: When the equity, capital of a company is listed on a stock exchange, the performance of the company is reflected in the market price of the equity stock, which is readily available for public consumption. Put differently, the company’s performance is more ‘visible’ in the eyes of public. Such a public exposure normally induces companies to raise their standard of performance. Guidance of Cost of Capital: The market value of the securities of company are required for computing its cost of capital. Such values can be obtained from stock market quotations. Hence the stock market offers guidance on cost of capital.

LISTING OF THE COMPANIES ON STOCK EXCHANGE

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Public Limited Company. • Public Listed Company • Public Non-listed Company ‘Listed Company’ means a public ltd Co which is --Listed on any one or more recognized stock exchanges in India. --Securities (shares: debentures) of such company are traded on such stock exchanges. ‘Unlisted company’ therefore means a company whose securities are not listed on any of recognized stock exchanges in India. Why Companies get Listed with Stock Exchange? Companies get listed with Stock Exchange for following reasons: --Securities are freely transferable. --Easy liquidity of securities. --Easy availability of prices of securities. --Reputation, Image, Goodwill. --Public awareness. --More transparency. --Helps in obtaining loans from Banks/Institutions. --Helps in marketing its Products.

In order to list securities of a company & get its shares traded on any recognized stock exchanges, the Public Ltd Company may either come out wit ha public issue (i.e. to offer further securities to public) or make an offer for sale of existing securities to public. This can be done by issuing of Prospectus & Complying with all The Provinces of Company Act 1956. 7

Each stock exchange has its own criteria for listing securities which should also be met. Eg: If company intends to get listed its securities in Bombay Stock Exchange, Mumbai post issue capital (paid up capital after proposed public issue) of such companies should be Rs. 10 Crores atleast. The Company enters into a listing agreement with concerned stock exchange & on receipt of permission from concerned Stock Exchange, company is listed and securities are thereafter traded on such stock exchange.

TRADING & SETTLEMENT Demat Account is a compulsory Account for traders who want to trade in stock market. This account is mainly used for buying and selling of shares.

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Trading: Each Stock Exchange has listed and permitted securities that are traded on it. There are two ways of organizing the trading activity. Open Outcry System Under the open outcry system traders shout and resort to signals on the trading floor of the exchange which consists of several ‘notional’ trading posts for different securities. A member (or his representative) wishing to buy or sell a certain security, reaches the trading post where the security is traded. Here, he comes in contact with others interested in transacting in that security. Buyers make their bid and sellers make their offers and bargains are closed at mutually agreed-upon prices. In stock where jobbing is done, the jobber plays an important role. He stands ready to buy or sell on his account. He quotes his bid (buying) and ask (selling) prices. He provides some stability and continuity to the market. Screen Based System In the screen-based system the trading ring is replaced by the computer screen and distant participants can trade with each other through the computer network. A large screen based trading system (a) enhances the informational efficiency of the market as more participants trade at a faster speed; (b) permits the market participants to get a full view of the market, which increases their confidence in the market; and (c) establishes transparent audit trails.

Settlement: The settlement of transactions is done on a settlement period basis. Earlier, the settlement period on the Indian Stock Exchanges was 7 days, but now it is T+1 settlement. T+1 includes the day of trade

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and an additional day. During a settlement period, buying and selling transactions in a particular security can be squared up. Square off is a same day settlement cycle. At the end of settlement period, transactions are settled on net basis. Since the settlement period used to be 7 days and the settlement is for the net position, most of the transactions are squared within the settlement period. Clearly these transactions are motivated by a desire to profit from price variations within the settlement period. Traditionally, trades have been settled by physical delivery. This means that the securities have to physically move from the seller to the seller’s broker, from the seller’s broker to the buyer’s broker (through the clearing house of the exchange or directly), and from the buyer’s broker to the buyer. Further the buyer has to lodge the securities with the transfer agents of the company and the process of the transfer may take one to three months. This leads to high paperwork cost and creates bad paper risks. To mitigate the cost and the risks associated with the physical delivery, settlement in the developed securities market is mainly through electronic delivery facilitated by depositories. A ‘depository’ is an institution which immobilizes physical certificates (of securities) and effect transfers of ownership by electronic book entry. A beginning in the direction of electronic delivery has been made in India with the establishment of the National Securities Depository Limited (NSDL), India’s first depository, in 1996. As NSDL expands its operations and as new depositories come into being, settlement will progressively be done more by electronic delivery and less by physical delivery.

INVESTMENT Investment means the use of money for the purpose of making more money, to gain income or increase capital, or both.

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Short Term Investment Long Term Investment

Short Term Investment: It is more risky A successful short term trading mindset instead requires iron discipline, intense focus and steely devotion. Short term trading can be divided in 3 sections • Day Trading • Swing Trading • Position Trading

Day Trading Day traders buy and sell stocks throughout the day in the hope that the price of the stocks will fluctuate in value during the day, allowing them to earn quick profits. A day trader will hold a stock anywhere from a few seconds to few hours, but will always sell all of those stocks close of the day. The day trader will therefore not own any position at the close of the each day, and there is overnight risk. The objective of day trading is to quickly get in and out of any particular stock for profits anywhere from few cents to several points per share on an intra-day basis. Day trading can be further sub-divided into number of styles, including.

Scalpers: This style of day trading involves the rapid and repeated buying and selling of a large volume of stocks within seconds or minutes. The objective is to earn a small per share profit on each transaction while minimizing the risk. Momentum Traders: This style of day trading involves identifying and trading stocks that are in a moving pattern during the day, in an attempt to buy stocks at bottoms and sell at tops. 11

Swing Trading The principal difference between day trading and swing trading is that swing traders will normally have a slightly longer time horizon than day traders for holding a position in a stock. As is the case with day traders, swing traders also attempt to predict the short term fluctuation in a stock’s price. However swing traders are willing to hold the stocks for more than one day, if necessary, to give to stock price some time to move or to capture additional momentum in the stock’s price. Swing traders will generally hold on to their stock positions anywhere from a few hours to several days. Swing trading has the capability of providing higher returns than day trading. However, unlike day traders who liquidate their positions at the end of each day, swing traders assume overnight risk. There are some significant risks in carrying positions overnight. For example news events and earnings warnings announced after the closing bell can result in large, unexpected and possibly adverse changes to a stock's price

Position Trading Position trading is similar to swing trading, but with a longer time horizon. Position traders hold stocks for a time period anywhere from one day to several weeks or months. These traders seek to identify stocks where the technical trends suggest a possible large movement in price is likely to occur, but which may not be fully played out for several weeks or months.

Long Term Investment: A successful long term trading mindset requires, above all, patience and perseverance. These are more difficult attributes to develop in the average trader. Too often the average short-term trader succumbs to the markets lure and develops a frantic, get-it-now mindset believing every price blip represents a trading opportunity. As this attitude is fanned by

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the media and brokerage industry, more and more long term traders have become aggressive swing traders and swing traders become rabid day traders - more often than not with disastrous consequences. Long term trading results in less trades with fewer mistakes and lower commission and slippage costs because overtrading is one of the biggest sources of losses facing both new and established traders. Why is this so? Obviously, more trades mean more commissions and more slippage. Few short-term traders realize, however, that their total commission and slippage costs in any year often exceed their total losses for the year. In other words, many losing short-term traders would have actually made money on an annual basis had they not incurred the exorbitant commission and slippage costs of trading throughout the year. Fewer trades mean fewer mistakes. Long term trading unlike short term requires dramatically reduced time for analysis and trading. If you are trading using weekly data, only one to two hours each weekend are required to implement a sophisticated long term trading system for 21 or more commodities. This includes the time to completely download your quotes and update your data files, verify which are the correct months to trade for each commodity, figure out if you have any positions to rollover, generate your trading signals, and write down orders to your broker. On the contrary a typical successful day trader literally becomes a slave to their quote machines during market hours.

FACTORS AFFECTING BSE There are various factors that affects BSE:

(a) THE KETAN PAREKH SCAM

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Ketan Parekh was a graduate from HR College and CA by profession. Ketan Parekh’s scam was often referred to as the one-man army or Pentafour Bull. The 176-point Sensex crash on March 1, 2001 came as a major shock for the Government of India, the stock markets and the investors alike This sudden crash in the stock markets prompted the Securities Exchange Board of India (SEBI) to launch immediate investigations into the volatility of stock markets. The scam shook the investor's confidence in the overall functioning of the stock markets. By the end of March 2001, at least eight people were reported to have committed suicide and hundreds of investors were driven to the brink of bankruptcy. The first arrest in the scam was of the noted bull, Ketan Parekh (KP), on March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports abounded as to how KP had single handedly caused one of the biggest scams in the history of Indian financial markets. He was charged with defrauding Bank of India (BoI) of about $30 million among other charges. KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147 points. By this time, the scam had become the 'talk of the nation,' with intensive media coverage and unprecedented public outcry. Bank of India along with Punjab National Bank and SBI were at the receiving end. Madhavapura Bank and Classic Cooperative Bank are the others affected. Ketan Parekh owes around Rs1.3bn to the Bank of India KP’s scam was one of the major scam in India after Harshad Mehta which lost the confidence of investors in investing in share market. KP’s scam is also regarded as one mans army scam.

(b) FOREIGN INSTITUTIONAL INVESTORS (FII)

Foreign investment refers to investments made by residents of a country in another country’s financial assets and production processes. After the opening up of the borders for capital movement, foreign investments in India have grown enormously. It

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affects the productivity factor of the beneficiary or the receiver country and has the potential to create a ripple effect on the balance of payments of that country. In developing countries like India, foreign capital helps in increasing the productivity of labor and to build up foreign exchange reserves to meet the current account deficit. It provides a channel through which these countries can have access to foreign capital. Foreign investment can be of two forms: Foreign direct investment (FDI) and Foreign portfolio investment (FPI).FDI involves direct production activity and has a medium to long term investment plans. In contrast the FPI has a short term investment horizon. They mostly investment in the financial markets which consist of Foreign Institutional Investors (FIIs). They invest in domestic financial markets like money market, stock market, foreign exchange market etc. According to Michael Frenkel and Lukas Menkhoff, “FIIs are beneficial for an economy under specific institutional conditions. It is defining characteristic of an emerging market that these conditions are often not met”. Foreign institutional investors ‘investments are volatile in nature, and they mostly invest in the emerging markets. They usually keep in mind the potential of a particular market to grow. FII has lead a significant improvement in India relating to the flow of foreign capital during the period of post economic reforms. The inflow of FII investments has helped the stock market to raise at a greater height according to financial analysts. Sensex touched a new height. It crossed 10000-mark in January 2006, which was 8073 on November 2, 2005, and 9323 in December 2005 FII participation in the Indian stock market triggers its upward movement, but, at the same time, increased liquidity through FII investment inflow increases volatility too.

FIIs’ IMPACT ON THE INDIAN ECONOMY. The Ashok Lahiri Committee Report on encouraging FII Flows (Ministry of Finance, the Government of India) mentions some reasons for the need of FII flows. FII flows supplement and augment domestic savings 15

and domestic investment without increasing the foreign debt of our country. Capital inflows to the equity market increase stock prices lower the cost of equity capital and encourage investment by Indian firms. The Indian stock markets are both shallow and narrow and the movement of stocks depends on limited number of stocks. As FIIs purchases and sells these stocks there is a high degree of volatility in the stock markets. If any set of development encourages outflow of capital that will increase the vulnerability of the situation. The high degree of volatility can be attributed to the following reasons: •

The increase in investment by FIIs increases stock indices in turn increases the stock prices and encourages further investments. In this event when any correction takes place the stock prices declines and there will be full out by the FIIs in large number as earning per share declines.

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The FIIs manipulate the situation of boom in such a manner that they wait till the index raises up to a certain height and exit at an appropriate time. This tendency increases the volatility further.

So even though the portfolio investment by FIIs increases the flow of money in the economic system, it may create problems of inflation.

TRANSFORMATION OF THE STOCK EXCHANGE, MUMBAI TO BSE LTD. The change in the name of Asia's oldest stock exchange, from the Stock Exchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of more than cosmetic significance. Along with the change in name comes a new perspective, one brought about by a comprehensive change in its ownership and management. Until now, the BSE like most other exchanges in India was owned and managed by brokers, who also had the sole right to trade in the exchanges. Conflicts of interest were bound to arise in such situations. Until the advent of the National Stock

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Exchange in 1994, the BSE was India's pre-eminent exchange, accounting for an overwhelmingly large proportion of the share market transactions of the country. Companies wherever located were advised to seek a listing of their shares on the BSE so that they could have access to its large reservoir of capital and investor base. Legally speaking, it was enough if they listed their shares on any one of the regional stock exchanges, closest to their registered office. This last rule, like so many others connected with the securities market, had to be discarded in the wake of the sweeping changes in the financial markets since the 1990s. Perceptions of both investors and regulators changed dramatically forcing the stock exchanges to overhaul themselves. A series of securities scams through the 1990s in which brokers were invariably held accountable, the inability of the broker-dominated exchanges to check malfeasance, and a vastly expanding role for the capital market in the national economy necessitated a thorough review of the age-old stock market structure. In the new demutualised and corporatised exchanges that came about as part of a major capital market reform a time-bound program for 10 other exchanges has since been announced — the right to trade is segregated from the right to own and manage the exchange. The transition is not going to be easy as it involves the imparting of a much greater degree of professionalism. Stock market professionals from outside the broking community are reportedly in short supply. By far the biggest unknown factor relates to the future ownership of the exchange. Brokers will cede control and investors including retail ones will hold a substantial portion of the exchange's equity. Apart from this being totally new to India, it does raise the possibility of other conflicts of interest including the one connected with the listing of its own shares.

CONCLUSION With the increasing Globalization, the Stock Exchange’s have tremendously affected the financial conditions of India. The stock markets of the future will have a redefined pupose and reinvented architecture due to the advent and widespread use of technology. Information and stock price quotations are available almost instantaneously, and, more importantly, investors can act on this data by executing a trade from anywhere at anytime. This new

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market will bring benefits to investors, the listed companies, and the economies of the company. Trading will become cheaper, faster and settlement will be simpler wit reduced risk. Raising capital for companies will become easier, thereby contributing directly to the Economic Growth. Already, BSE has shown its proactive response by increasingly using leading edge to technologies to effectively compete in the global environment. In the not too distant future, once full capital account convertibility is permitted in India, one could well witness an expansion of trading volumes and its resultant economic benefits to the thriving and ever young metropolis of Mumbai. Inspite of all these positive predictions, the future of Stock Exchanges is likely to be uncertain and even their survival is a major question mark.

BIBLIOGRAPHY The information provided in this project have been taken from the following sources:

WEBSITES • • • •

www.indiainfoline.com www.countercurrents.org www.icfai.org www.bseindia.com

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• • • •

www.moneycontrol.com www.indlaw.com www.sebi.gov.in www.bombayfirst.org

BOOKS •

Fundamentals Of Financial Management –PRASANNA CHANDRA

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Portfolio Organizer ( The ICFAI University Press) – Edition : Dec’05, Mar’06, May’06, Jun’06

GROUP MEMBERS

• SATINDER RANA

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• UPASANA RATHOD -

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• MITALI SINGHI

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• EKTA SOLANKI

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• BHAKTI THAKKAR

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• ANKIT MEHTA

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Since it has been a new experience for us to work on such project, you may find some mistakes in the project. We would be grateful if you bring them to our knowledge. We sincerely apologize for the mistakes. - GROUP MEMBERS

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