Indian Stock Market

Indian Stock Market

As a part of the process of economic liberalization, the stock market has been assigned an important place in financing the Indian corporate sector. Besides enabling mobilizing resources for investment directly from the investors, providing liquidity for the investors and monitoring and disciplining company managements are the principal functions of the stock markets. The main attraction of the stock markets is that they provide entrepreneurs and governments a means of mobilizing resources directly from the investors, and to the investors they offer liquidity. It has also been suggested that liquid markets improve the allocation of resources and enhance prospects of long-term economic growth. Stock markets are also expected to play a major role in disciplining company’s managements. In India, Equity market development received emphasis since the very first phase of liberalization in the early ‘eighties. Additional emphasis followed after the liberalization process got deepened and widened in 1991 as development of capital markets was made an integral part of the restructuring strategy. Today, Indian markets conform to international standards both in terms of structure and in terms of operating efficiency. The concept of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was established as ‘The Native Share and Stockbrokers Association’ a voluntary non-profit making association. We all know it, the Bhaji (Sabji) market in your neighbourhood is a place where vegetables are bought and sold. Like Bhaji (Sabji) market, a stock market as a place where stocks shares are bought and sold. The stock market determines the day’s price for a stock through a process of bid and offer. You have right to bid and buy a stock share and offer to sell the stock shares at a valuable price. Buyers compete with each other for the best bid and got their highest price quoted to purchase a particular Stock Market Shares. Similarly, sellers compete with each other for the lowest price quoted to sell the stock. When a match is made between the best bid and the best offer a trade is executed. In automated exchanges highspeed computers do this entire job. Stocks of various companies are listed on stock exchanges. Presently there are 23 stock markets In India. The Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and the Calcutta Stock Exchange (CSE) are the three large stock exchanges. There are many small regional exchanges located in state capitals and other major cities. The Indian Stock markets have played a significant role in the early attempts at industrialization in India in the late nineteenth and early twentieth centuries. The early textile mills and the first steel plants were funded in the stock market. Some of these capital raising exercises were large in relation to the size of the financial sector in those days. Beginning in the late fifties, the country embarked on an inward-looking socialistic model of development that sought to put the commanding heights of the economy in the hands of the public sector. The state took control of the allocation of resources in the economy as the banks and insurance companies were nationalized and development financial institutions grew in importance. A regime of financial repression came into being and the stock market stagnated. The period from 1984 to 1992 was in some ways the high-water mark of the Indian capital markets. As the markets responded enthusiastically to the first whiff of reforms in the mid-1980s and to the major reform initiative of 1991, the stock market soared through the roof. From October 1984 to September 1992, the stock market index went up more than ten times representing an annual compound return of 34per cent. In the post-independence era, the BSE dominated the volume of trading. However, the low level of transparency and undependable clearing and settlement systems, apart from other macro factors, increased the need of a financial market regulator, and the SEBI was born in 1988 as a non-statutory body. It was made a statutory body in 1992. After the Harshad Mehta scam in 1992, there was a pressing need for another stock exchange large enough to compete with the BSE and bring transparency to the stock market. This gave birth to the National Stock Exchange (NSE). It was incorporated in 1992, become recognized as a stock exchange in 1993, and trading began on it in 1994. It was the first stock exchange on which trading took place electronically. In response to this competition, BSE also introduced an electronic trading system known as BSE On-line Trading (BOLT) in 1995. The BSE launched its sensitivity index, the Sensex, now known as the S&P BSE Sensex, in 1986 with 1978–79 as the base year. This is an index of 30 companies and is a benchmark stock index, measuring the overall performance of the exchange. The index reached the level of 1,000 in July 1990, 2,000 in January 1992, 4,000 in March 1992, 5,000 in October 1999, and 6,000 in February 2000. The exchange introduced equity derivatives in 2000. Index options were launched in June 2001, stock options in July 2001, and stock futures in November 2001. India’s first free-float index, BSE Teck, was launched in July 2001. Its competitor, NSE, launched its benchmark exchange, the CNX Nifty, now known as Nifty 50, in 1996. It comprises of 50 stocks and functions as the performance measure of the exchange. In terms of electronic screen-based trading and derivatives, it beat BSE by launching first of its kind products and services.

Functions of Stock Exchange/Market

1. Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country. Every major change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.
2. Pricing of Securities: The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth-oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities.
3. Safety of Transactions: In stock market only, the listed securities are traded and stock exchange authorities include the companies’ names in the trade list only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth: In stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth. 
5. Spreading of Equity Cult: Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating public about investment. 
6. Providing Scope for Speculation: To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities.
7. Liquidity: The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term.
8. Better Allocation of Capital: The shares of profit-making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of loss-making companies. So, stock exchange facilitates allocation of investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment: The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.

Factors Affecting Stock Exchange/Market

1. Government Policies – Economy and industries are often affected highly by government policies. The government tends to implement new policies in regard to the economic condition of the nation. Any new change in policy can create a highly profitable scene for the economy or tighten the grip around. This creates a possibility of the stock market being affected due to any change or launch of government policy. The increase in corporate taxes impacts the industry severely as their profits will take a hit and simultaneously the stock price will plunge. Similarly, markers like fiscal policy also impact the share market as it has a major role to play in the financial bearings of the industry. You can take into consideration the interest rates, whenever the interest rates go up, banks raise the lending rates which tend to increase the cost for corporate and individuals alike. The rising cost will tend to create an impact on the profit levels affecting the stock prices of the company. Similarly, for the individual, the rising cost will create a dent in the pocket decreasing the purchasing power of the consumer. The way automobile and real estate sectors were affected is a testament to it.
2. Monetary and Regulatory Policies – Reserve Bank of India (RBI) is the apex body which regulates the monetary policy in India. RBI tends to bring different monetary policies as regards to the economy of the nation. One such step is the revision in the repo rate from time to time based on their view towards inflation. This change impacts the loan rates and the interest rates in the market. When the loan rates decrease, then the expenses on the consumer level will decrease allowing people to invest in the stock market. Similarly, the Securities and Exchange Board of India (SEBI) keeps a guard on the stock market ecosystem. They launch a mandate regarding the stock market to regulate trading. The recent crackdown on the fraudulent brokers added with the announcement of the stop on margin trading; tends to create a ripple effect on the market. The investors may look to equity shares with an air of caution when the SEBI regulatory announcements come in.
3. Currency Strength – Currency defines the economy of the nation. The exchange rates are a marker to check the currency strength of a nation. The exchange rates between dollars and rupee showcase the strength of the Indian currency across the global economy. Any fluctuations in the rate will create an impact on the finance market. And when that happens a multi-chain impact is created on. There are plenty of Indian companies who have an overseas connection and conduct business with foreign companies. Companies that depend on foreign trades tend to go through cycles of change. For say, if the rupee tends to be strong, then that will mean lower sales invoices for the company dealing with payments in dollars decreasing their net profit and ultimately creating a dent in the stock value of the company. Meanwhile at the same time imports do get cheaper though and people will have more to spend for allowing them to partake into investment in the share market. Taking into same when the rupee tends to perform badly against the dollar, the imports will tend to be expensive and it will severally impact the purchasing power of the individual stopping them from venturing into investing in the share market. In the meantime, the sales invoice will get higher value for those dealing with foreign companies and their profit levels will increase.
4. Economic Indicators – There are various economic indicators that affect the overall economy of the nation ultimately creating an impact on the financial market. The major of the lot is oil prices which are detailed by the OPEC data and GDP. The markers like OPEC data allow for a detailed analysis of the future happenings on the oil market. For a nation who is dependent on imported oil, any change in price is likely to create a dent in the nation’s economy. The movement of oil prices is one of the key determinants of the stock market. As and when the prices rise, the expense tends to rise to create a hit for the buyers. That will lower their ability to invest in the market due to hit rendered by the increased oil prices. Similarly, Gross Domestic Product (GDP) is the marker for the nation’s economy. It looks at the aspect of total economic production of the country and its overall economic health. It helps to showcase the economic developments and the future direction of the market. A healthy GDP status will directly create an impact on the financial markets and investment.
5. FII and DII – Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs) tend to impact the stock market very much. As they tend to have a prominent role in the stocks of the company, their entry or exit will create a huge footprint in the equity market and will impact the stock prices.
6. Natural Disaster – Natural disasters tend to create a chaotic situation in life. These natural disasters tend to hamper the lives and the market equally. It impacts the company’s performance and the capacity of people to spend the money. This will lead to lower levels of consumption, lower sales and revenues ultimately denting the company’s stock profile.
7. Political Aspect – Speaking of political impact, factors like election, budget, government intervention, stability, and other factors affect the economy and the financial markets hugely. The political events and further announcements like budgets tend to create tremendous levels of volatility in the market influencing the stock market deeply. The same has been seen plenty of times over the period with the cases like elections and riots where the market has taken a hit quite a lot.