EFFECT OF STOCK MARKET ON INDIAN

ECONOMY

SUBMITTED TOWARDS PARTIAL FULFILLMENT

OF

POST GRADUADTE DIPLOMA IN

BUSINESS MANGEMENT
(Approved by AICTE, Govt. of India)
(Equivalent to MBA)

ACADEMIC SESSION
2009 – 2011

Subject – EEP

Submitted to: submitted by:

Dr. Tapan Kumar Nayak Abhinav(09249)

Faculty of IMS Akanksha(09250)
Ghaziabad Aman
Arora(09251)
Amit kumar(09252)
Amritanshu(09253)

INSTITUTE OF MANAGEMENT STUDIES

LALQUAN GHAZIABAD
UTTAR PRADESH – 201009 INDIA
DECEMBER 2009

1
 INSTITUTE OF MANAGEMENT STUDIES,
GHAZIABAD

CANDIDATE’S DECLARATION

We hereby certify that the work which is being presented in

the report entitled Effect of stock market on Indian economy
in partial fulfilment of the requirements for the award of the Post
Graduate Diploma In Business Management and submitted in the
EEP of the Institute of Management Studies, Ghaziabad is an
authentic record of our own work carried out during a period from
November, 2009 December, under the supervision of Dr. Tapan
Kumar Nayak, Faculty of Institute of Management Studies,
Ghaziabad.
The matter presented in this report has not been submitted
by us for the award of any other degree of this or any other
Institute.

(ABHINAV)
(AKANKSHA)
(AMAN ARORA)
(AMIT KUMAR)
(AMRITANSHU)

2
 ACKNOWLEDGEMENT

Any assignment puts to litmus test of an individual

knowledge credibility or experience and thus sole efforts of an
individual are not sufficient to accomplish the desire successful
completion of a project involve interest and effort of many people
and so this becomes obligatory on the part to record our thanks to
those who helped us out in the successful completion of our
project.

Life is a process of accumulating and discharging debts, not

all of those can be measured. We can not hope to discharge them
with simple words of thanks but we can certainly acknowledge
them.

At this level of understanding it is often difficult to comprehend

and assimilate a wide spectrum of knowledge without proper
guidance and advice. Hence, we would like to take this opportunity
to express our Heartfelt Gratitude to Respected
Dr. Tapan Kumar Nayak, PGDBM, IMS, Ghaziabad, for his
round the clock Enthusiastic Support, Noble Guidance and

3
Encouragement which made this project successful. We are
extremely thankful to him for making this project worthful.

TABLE OF CONTENTS:-

PAGE
NO.

1. INTRODUCTION- INDIAN ECONOMY 6

2. INDIA- A GROWING ECONOMY 8
3. STOCK MARKET 24
4. MARKET PARTICIPANTS 26
5. IMPORTANCE OF STOCK MARKET 27
6. BIBLIOGRAPHY
33

4
 LIST OF TABLES: -

PAGE NO.

1. GRAPH- INDIA GDP GROWTH 8

2. PER CAPITA INCOME OF STATES OF INDIA 23

5
 INDIAN ECONOMY
INTRODUCTION

Economics experts and various studies conducted across the globe

envisage India and China to rule the world in the 21st century. For over
a century the United States has been the largest economy in the world
but major developments have taken place in the world economy since
then, leading to the shif The rich countries of Europe have seen the
greatest decline in global GDP share by 4.9 percentage points, followed
by the US and Japan with a decline of about 1 percentage point each.
Within Asia, the rising share of China and India has more than made up
the declining global share of Japan since 1990. During the seventies and
the eighties, ASEAN countries and during the eighties South Korea, along
with China and India, contributed to the rising share of Asia in world
GDP.

According to some experts, the share of the US in world GDP is expected

to fall (from 21 per cent to 18 per cent) and that of India GDP to rise
(from 6 per cent to 11 per cent in 2025), and hence the latter will
emerge as the third pole in the global economy after the US and China.

Indian Economy experienced a GDP growth of 9.0 percent during 2005-

06 to 9.4 percent during 2006-07. By 2025 the India's economy is
projected to be about 60 per cent the size of the US economy. The
transformation into a tri- polar economy will be complete by 2035, with
the Indian economy only a little smaller than the US economy but larger
than that of Western Europe. By 2035, India is likely to be a larger
growth driver than the six largest countries in the EU, though its impact

6
will be a little over half that of the US.
India, which is now the fourth largest economy in terms of purchasing
power parity, will overtake Japan and become third major economic
power within 10 years. t of focus from the US and the rich countries of
Europe to the two Asian giants- India and China

ISSUES AND PRIORTIES FOR INDIA

As India prepares herself for becoming an economic superpower, it must
expedite socio-economic reforms and take steps for overcoming
institutional and infrastructure bottlenecks inherent in the system.
Availability of both physical and social infrastructure is central to
sustainable economic growth. Since independence Indian economy has
thrived hard for improving its pace of development. Notably in the past
few years the cities in India have undergone tremendous infrastructure
up gradation but the situation in not similar in most part of rural India.
Similarly in the realm of health and education and other human
development indicators India's performance has been far from
satisfactory, showing a wide range of regional inequalities with urban
areas getting most of the benefits. In order to attain the status that
currently only a few countries in the world enjoy and to provide a more
egalitarian society to its mounting population, appropriate measures
need to be taken. Currently Indian economy is facing these challenges:

• Sustaining the growth momentum and achieving an annual

average growth of 7-8 % in the next five years.
• Simplifying procedures and relaxing entry barriers for business
activities.
• Checking the growth of population; India is the second highest
populated country in the world after China. However in terms of
density India exceeds China as India's land area is almost half of
China's total land. Due to a high population growth, GNI per capita
remains very poor. It was only $ 2880 in 2003 (world bank
figures).
• Boosting agricultural growth through diversification and
development of agro processing.
• Expanding industry fast, by at least 10% per year to integrate not
only the surplus labour in agriculture but also the unprecedented
number of women and teenagers joining the labour force every
year.
• Developing world-class infrastructure for sustaining growth in all
the sectors of the economy.
• Allowing foreign investment in more areas
• Effecting fiscal consolidation and eliminating the revenue deficit
through revenue enhancement and expenditure management.
• Empowering the population through universal education and
health care. India needs to improve its HDI rank, as at 127 it is

7
way below many other developing countries' performance. The
UPA government is committed to furtering economic reforms and
developing basic infrastructure to improve lives of the rural poor
and boost economic performance. Government had reduced its
controls on foreign trade and investment in some areas and has
indicated more liberalization in civil aviation, telecom and
insurance sector in the future.

India - a growing economy

8
A growth rate of above 8% was achieved by the Indian economy during the
year 2003-04 and in the advanced estimates for 2004-05, Indian economy
has been predicted to grow at a level of 6.9 %. Growth in the Indian
economy has steadily increased since 1979, averaging 5.7% per year in the
23-year growth record. In fact, the Indian economy has posted an excellent
average GDP growth of 6.8% since 1994 ( the period when India's external
crisis was brought under control). However, in comparison to many East
Asian economies, having growth rates above 7%, the Indian growth
experience lags behind. The tenth five year plan aims at achieving a growth
rate of 8% for the coming 2-3 years.

Though, the growth rate for 2004-05 is less than that of 2003-04, it is still
among the high growth rates seen in India since independence. Many factors
are behind this robust performance of the Indian economy in 2004-05. High
growth rates in Industry & service sector and a benign world economic
environment provided a backdrop conducive to the Indian economy. Another
positive feature was that the growth was accompanied by continued
maintenance of relative stability of prices. However, agriculture fell sharply

9
from its 2003-04 level of 9 % to 1.1% in the current year primarily because
of a bad monsoon. Thus, there is a paramount need to move Indian
agriculture beyond its centuries old dependency on monsoon. This can be
achieved by bringing more area under irrigation and by better water
management.

Because of the weakening of the US dollar for the last two years,
(caused mainly by widening US deficits), Indian Rupee has steadily
appreciated vis-à-vis US dollar. Though, this trend saw a brief reversal
during may-august 2004. The latest Re/$ Exchange rate (March 2005)
stood close to 44. Despite strengthening nominally against US $, Rupee
depreciated against other major non-dollar

A strong BOP position in recent years has resulted in a steady

accumulation of foreign exchange reserves. The level of foreign
exchange reserves crossed the US $100 billion mark on Dec 19, 2003
and was $142.13 billion on March 18, 2005. The capital inflows, current
account surplus and the valuation gains arising from appreciation of the
major non-US dollar global currencies against US dollar contributed to
such a rise in Forex reserves.

The current account of BOP having been in surplus since 2001-02,

turned into deficit in the first half of the current year( April-September
2004-05). Such a reversal was observed on the back of rise in POL and
non POL imports which overwhelmed the growth of exports in US dollar
terms at over 23 per cent. Growth momentum in exports was
maintained; India's exports during Apr-Nov registered a growth of 24%
from the last period but India's position was down from 30th to 31st
rank in the top exporting countries of the w The main contributors to
capital account surplus were the banking capital inflows, foreign
institutional investments and other capital inflows. Alike current account,
capital account too witnessed decline. The capital account surplus in
April-September was also down by around US $ 1.5 million.

Reserve money growth had doubled to 18.3% in 2003-04 from 9.2 in

2002-03, driven entirely by the increase in the net foreign exchange
assets of the RBI. However, it declined to 6.4% in the current year to
January 28, 2005. During the current financial year 2004-05, broad
money stock (M3) (up to December 10, 2004) increased by 7.4 per cent
(exclusive of conversion of non-banking entity into banking entity, 7.3
per cent) as compared with the growth rate of 10.3 per cent registered
during the corresponding period of the last year.

The downward trend in interest rates continued in 2004-05, with bank

rate standing at 6% as on Dec 10, 2004. Banks recovery management

10
improved considerably with gross NPAs declining from Rs 70861 crore in
2001-02 to Rs 68715 in 2002-03. During the current financial year (up
to December 10, 2004) incremental gross bank credit increased by 20.5
per cent (exclusive of conversion, 16.6 per cent) as compared with a
growth of 5.9 per cent in the same period of the previous year. Non-
Food credit during the financial year so far, registered a growth of 20.5
per cent (exclusive of conversion, 16.5 per cent) as compared with an
increase of 8.4 per cent during the same period of the last year indicated
a positive outlook. Equity market return was 85% in 2003-04, second
highest in Asia. With continued higher corporate earnings in 2004-05,
the sensex crossed 6800 mark in March 2005 but high stock market
volatility remained higher in India compared to other Asian countries.
The expectation of sensex crossing 7 K mark is not yet realized. Fiscal
deficit of states & center was decreasing in early 90s but due to rise in
fiscal deficit in recent years, corrective measures have been adopted.
The fiscal deficit decreased to 7.9% in 2004-05 from a 9.4% of GDP in
2003-04. According to recent estimates, fiscal deficit in April-October
2004 is 45.2 per cent of BE compared with 56.0 per cent of BE in the
corresponding period last year.

India's economy is on the fulcrum of an ever increasing growth curve. With positive
indicators such as a stable 8-9 per cent annual growth, rising foreign exchange
reserves, a booming capital market and a rapid rise in FDI in the last year, India
has emerged as the second fastest growing major economy in the world.

The economy has been growing at around 9 per cent in the past two years
recording a growth rate of 9 per cent and 9.4 per cent in 2005-06 and 2006-07
respectively. Significantly, the industrial and service sectors have been contributing
a major part of this growth, suggesting the structural transformation underway in the
Indian economy.

For example, industrial and services sectors have logged in a 10.9 and 11 per cent
growth rate in 2006-07 respectively, against 9.6 per and 9.8 cent in 2005-06.
Similarly, manufacturing grew by 9.1 per cent and 12.3 per cent in 2005-06 and
2006-07 and trade, hotel, transport and communication recorded a growth of 10.4
per cent and 13 per cent, respectively.

And this process continues in the current fiscal year. On the back of 8.4 per cent
and 9.6 per cent growth in GDP in the first quarter of 2005-06 and 2006-07, GDP
grew by 9.3 per cent during April-June 2007.

• While overall industrial production grew by 9.2 per cent during April-
September 2007, significantly, basic goods and capital goods rose by 9.4
per cent and 19.6 per cent this year compared to 8.8 per cent and 17.5 per
cent during the same period last year.

11
 • Services grew by 10.6 per cent in April-June 2007, compared to 9.2 per cent
and 11.7 per cent during the corresponding period in 2005-06 and 2006-07.
• Manufacturing grew by 9.7 per cent during April-September this year, on the
back of 12.3 per cent growth during the same period last year.
• Core infrastructure sector continued its growth rate recording 6.6 per cent
growth, with electricity generation rising by 7.6 per cent this year compared
to 6.7 per cent last year.
• Exports grew by 18.5 per cent in dollar terms during April-September 2007.
Imports increased by 25.5 per cent in April-September 2007.
• Money Supply (M3) has grown by a robust 22.5 per cent (year-on-year) as
of October 26, 2007 compared to 18.4 per cent last year.
• The annual inflation rate in terms of WPI was 2.97 per cent for the week
ended October 29, 2007 as compared to 5.35 per cent a year ago.
• Fiscal deficit and revenue deficit decreased by 6.1 per cent and 11.8 per
cent during April-September 2007-08 over the corresponding period last
year.

Gross Domestic GGG(GDP) : INDIA Domestic

ProdGGGRGGGGGGGGGGGGGGGGGGGGGGGGGGGRGG Gross
Domestic Product (GDP

Gross Domestic Product (GDP

FOR third successive year, the Indian economy has registered a highly
impressive growth during fiscal 2005-06. Sustained manufacturing
activity and impressive performance of the services sector with
reasonable support from the recovery in agricultural activity have
added greater momentum to this growth process. After recording some
slowdown in the third quarter (October-December) of 2005-06, real
gross domestic product (GDP) registered a sharp increase in the fourth
quarter (January-March) of 2005-06 benefiting from a pick-up in
almost all segments of agriculture, industry and services. According to
the revised estimates released by the Central Statistical Organization
(CSO) in May 2006, real GDP accelerated from 7.5 per cent in 2004-05
to 8.4 per cent during 2005-06. The Indian economy has, thus,
recorded an average growth of over 8 per cent in the latest three years
(2003-04 to 2005-06).

12
 Growth Rates of Real GDP

Gross Domestic Product (GDP) : INDIA

13
FOR third successive year, the Indian economy has registered a highly impressive growth during
fiscal 2005-06. Sustained manufacturing activity and impressive performance of the services sector
with reasonable support from the recovery in agricultural activity have added greater momentum to
this growth process. After recording some slowdown in the third quarter (October-December) of
2005-06, real gross domestic product (GDP) registered a sharp increase in the fourth quarter
(January-March) of 2005-06 benefiting from a pick-up in almost all segments of agriculture, industry
and services. According to the revised estimates released by the Central Statistical Organization
(CSO) in May 2006, real GDP accelerated from 7.5 per cent in 2004-05 to 8.4 per cent during 2005-
06. The Indian economy has, thus, recorded an average growth of over 8 per cent in the latest three
years (2003-04 to 2005-06).

Growth Rates of Real GDP

(Base Year : 1999-2000)

(Per cent)

2004-05 2005-06
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Agriculture -0.2 10.0 0.7 3.9 3.5 -0.2 -1.2 1.5 3.4 4.0 2.9 5.5
Allied Activities (23.5) (22.2) (20.8) (19.9) - - - - - - - -
1.1 Agriculture -0.5 10.7 0.7 - - - - - - - - -
Industry 5.2 6.6 7.4 7.6 6.6 8.0 8.1 6.8 9.5 6.3 7.0 7.9
(19.7) (19.5) (19.5) (19.3) - - - - - - - -
2.1 Mining and 4.4 5.3 5.8 0.9 8.2 6.0 5.7 3.7 3.1 -2.6 0.0 3.0
Quarrying
2.2 Manufacturing 5.7 7.1 8.1 9.0 6.6 8.3 9.2 8.1 10.7 8.1 8.3 8.9
2.3 Electricity, Gas and 2.8 4.8 4.3 5.3 4.9 7.9 3.1 1.4 7.4 2.6 5.0 6.1
Water Supply
Services 6.6 8.5 10.2 10.3 10.0 8.2 10.6 11.6 10.1 10.3 9.7 11.0
(56.8) (58.3) (59.7) (60.7) - - - - - - - -
3.1 Trade, Hotels, 8.5 12.0 9.7 11.0 10.2 12.9 10.6 11.5 10.6 11.2 11.7 11.0
Restaurants, Transport,
Storage and
Communication
3.2 Financing, 6.5 4.5 9.2 9.7 8.8 7.5 9.7 10.7 8.8 10.5 8.9 10.5
Insurance, Real Estate
and Business Services
3.3 Community, Social 4.1 5.4 9.2 7.8 10.7 4.8 8.5 12.7 7.3 8.0 8.4 7.6

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 (Base Year : 1999-2000)

World GDP growth hinges on India, China

Our Bureau

Chennai , Oct. 13

INDIA and China rank 154th and 121st in a listing of the 230-odd
countries ranked by per capita GDP. So no matter how rapid the growth
of these countries, it would do little to boost the growth of the world
economy. Right?

Not really. Low as per capita GDP for India and China may be ($3,100
and $5,600 respectively), their share in world GDP is around 6 per cent,
thanks to their billion-plus populations.

The other eight in the top 10 countries of the world ranked by total GDP
— the US (No. 1), Japan (No. 2), Germany (No. 3), UK (No. 4), France
(No. 5), Italy (No. 7), Spain (No. 8) and Canada (No. 9) — together
account for 66 per cent of world GDP. But their sustainable rate of
growth is generally around 2 per cent a year, compared to 7 per cent
and 10 per cent for India and China respectively.

Because of this, the share of India and China in incremental world GDP
(which, at the rate of 4 per cent a year, amounts to $1.6 trillion a year)
is 13 per cent, almost double their weight in total world GDP.

In contrast the other eight countries in the top 10, which have a 66 per
cent share in world GDP, have only a 33 per cent share in incremental

15
GDP. In the absence of a major breakthrough in technology, this
scenario is likely to remain unchanged over the next four or five
decades. This is because of the as yet relatively virgin markets in India
and China and high rates of return available on capital invested there as
compared to investments in developed economies.

Two conclusions emerge. First, growth of world GDP is more critically

dependent on the rate of growth in China, and, more particularly, India
than on the other eight countries in the top 10 - which are already
functioning at near-peak potential.

Second, though India and China will increase their ranking in world GDP
at a relatively slow pace, their rank in terms of per capita GDP (and
therefore disposable personal income) is going to shoot up in leaps and
bounds

16
Per capita Income of States of India

17
18
Stock market

A stock market is a private or public market for the trading of company stock and
derivatives of company stock at an agreed price; both of these are securities listed on a stock
exchange as well as those only traded privately.

The Definition

The expression 'stock market' refers to the system that enables the trading of
company stocks (collective shares), other securities, and derivatives. Bonds are still
traditionally traded in an informal, over-the-counter market known as the bond
market. Commodities are traded in commodities markets, and derivatives are traded
in a variety of markets (but, like bonds, mostly 'over-the-counter').

The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the
'stock market' is estimated at about $51 trillion. The world derivatives market has
been estimated at about $480 trillion 'face' or nominal value, 30 times the size of the
U.S. economy…and 12 times the size of the entire world economy.[1] It must be
noted though that the value of the derivatives market, because it is stated in terms of
notional values, cannot be directly compared to a stock or a fixed income security,
which traditionally refers to an actual value. (Many such relatively illiquid securities
are valued as marked to model, rather than an actual market price.)

The stocks are listed and traded on stock exchanges which are entities (a corporation
or mutual organization) specialized in the business of bringing buyers and sellers of
stocks and securities together. The stock market in the United States includes the
trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on
the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of
stock exchanges include the Paris Bourse (now part of Euronext), the London Stock
Exchange and the Deutsche Börse.

Trading

19
Participants in the stock market range from small individual stock investors to large
hedge fund traders, who can be based anywhere. Their orders usually end up with a
professional at a stock exchange, who executes the order.

Some exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This type of auction is used in
stock exchanges and commodity exchanges where traders may enter "verbal" bids
and offers simultaneously. The other type of exchange is a virtual kind, composed of
a network of computers where trades are made electronically via traders.

Actual trades are based on an auction market paradigm where a potential buyer bids
a specific price for a stock and a potential seller asks a specific price for the stock.
(Buying or selling at market means you will accept any ask price or bid price for the
stock, respectively.) When the bid and ask prices match, a sale takes place on a first
come first served basis if there are multiple bidders or askers at a given price.

The purpose of a stock exchange is to facilitate the exchange of securities between

buyers and sellers, thus providing a marketplace (virtual or real). The exchanges
provide real-time trading information on the listed securities, facilitating price
discovery.

The New York Stock Exchange is a physical exchange, also referred to as a listed
exchange — only stocks listed with the exchange may be traded. Orders enter by
way of exchange members and flow down to a specialist, who goes to the floor
trading post to trade stock. The specialist's job is to match buy and sell orders using
open outcry. If a spread exists, no trade immediately takes place--in this case the
specialist should use his/her own resources (money or stock) to close the difference
after his/her judged time. Once a trade has been made the details are reported on the
"tape" and sent back to the brokerage firm, which then notifies the investor who
placed the order. Although there is a significant amount of human contact in this
process, computers play an important role, especially for so-called "program
trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done over a
computer network. The process is similar to the New York Stock Exchange.
However, buyers and sellers are electronically matched. One or more NASDAQ
market makers will always provide a bid and ask price at which they will always
purchase or sell 'their' stock.[2].

The Paris Bourse, now part of Euronext, is an order-driven, electronic stock

exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an
open outcry exchange. Stockbrokers met on the trading floor or the Palais
Brongniart. In 1986, the CATS trading system was introduced, and the order
matching process was fully automated.

20
From time to time, active trading (especially in large blocks of securities) have
moved away from the 'active' exchanges. Securities firms, led by UBS AG,
Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of
U.S. security trades away from the exchanges to their internal systems. That share
probably will increase to 18 percent by 2010 as more investment banks bypass the
NYSE and NASDAQ and pair buyers and sellers of securities themselves, according
to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant
[citation needed].

Now that computers have eliminated the need for trading floors like the Big Board's,
the balance of power in equity markets is shifting. By bringing more orders in-
house, where clients can move big blocks of stock anonymously, brokers pay the
exchanges less in fees and capture a bigger share of the $11 billion a year that
institutional investors pay in trading commissions[citation needed].

Market participants
Many years ago, worldwide, buyers and sellers were individual investors, such as
wealthy businessmen, with long family histories (and emotional ties) to particular
corporations. Over time, markets have become more "institutionalized"; buyers and
sellers are largely institutions (e.g., pension funds, insurance companies, mutual
funds, hedge funds, investor groups, and banks). The rise of the institutional investor
has brought with it some improvements in market operations. Thus, the government
was responsible for "fixed" (and exorbitant) fees being markedly reduced for the
'small' investor, but only after the large institutions had managed to break the
brokers' solid front on fees (they then went to 'negotiated' fees, but only for large
institutions).

However, corporate governance (at least in the West) has been very much adversely
affected by the rise of (largely 'absentee') institutional 'owners.'

History
Historian Fernand Braudel suggests that in Cairo in the 11th century Muslim and
Jewish merchants had already set up every form of trade association and had
knowledge of every method of credit and payment, disproving the belief that these
were invented later by Italians. In 12th century France the courratiers de change
were concerned with managing and regulating the debts of agricultural communities
on behalf of the banks. Because these men also traded with debts, they could be
called the first brokers. In late 13th century Bruges commodity traders gathered
inside the house of a man called Van der Beurse, and in 1309 they became the
"Brugse Beurse", institutionalizing what had been, until then, an informal meeting.
The idea quickly spread around Flanders and neighboring counties and "Beurzen"
soon opened in Ghent and Amsterdam.

21
In the middle of the 13th century Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended to
lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence
also began trading in government securities during the 14th century. This was only
possible because these were independent city states not ruled by a duke but a council
of influential citizens. The Dutch later started joint stock companies, which let
shareholders invest in business ventures and get a share of their profits - or losses. In
1602, the Dutch East India Company issued the first shares on the Amsterdam Stock
Exchange. It was the first company to issue stocks and bonds.

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the
first stock exchange to introduce continuous trade in the early 17th century. The
Dutch "pioneered short selling, option trading, debt-equity swaps, merchant
banking, unit trusts and other speculative instruments, much as we know them"
(Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5,
2001). There are now stock markets in virtually every developed and most
developing economies, with the world's biggest markets being in the United States,
Canada, China (Hongkong), India, UK, Germany, France and Japan.

Importance of stock market

Function and purpose
The stock market is one of the most important sources for companies to raise
money. This allows businesses to go public, or raise additional capital for
expansion. The liquidity that an exchange provides affords investors the ability to
quickly and easily sell securities. This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real estate.

History has shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood.
Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and
their consumption. Therefore, central banks tend to keep an eye on the control and
behavior of the stock market and, in general, on the smooth operation of financial
system functions. Financial stability is the raison d'être of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they
collect and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty could default
on the transaction.

The smooth functioning of all these activities facilitates economic growth in that
lower costs and enterprise risks promote the production of goods and services as

22
well as employment. In this way the financial system contributes to increased
prosperity.

Relation of the stock market to the modern financial

system
The financial system in most western countries has undergone a remarkable
transformation. One feature of this development is disintermediation. A portion of
the funds involved in saving and financing flows directly to the financial markets
instead of being routed via banks' traditional lending and deposit operations. The
general public's heightened interest in investing in the stock market, either directly
or through mutual funds, has been an important component of this process. Statistics
show that in recent decades shares have made up an increasingly large proportion of
households' financial assets in many countries. In the 1970s, in Sweden, deposit
accounts and other very liquid assets with little risk made up almost 60 per cent of
households' financial wealth, compared to less than 20 per cent in the 2000s. The
major part of this adjustment in financial portfolios has gone directly to shares but a
good deal now takes the form of various kinds of institutional investment for groups
of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment
of premiums, etc. The trend towards forms of saving with a higher risk has been
accentuated by new rules for most funds and insurance, permitting a higher
proportion of shares to bonds. Similar tendencies are to be found in other
industrialized countries. In all developed economic systems, such as the European
Union, the United States, Japan and other developed nations, the trend has been the
same: saving has moved away from traditional (government insured) bank deposits
to more risky securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage
the associated increased risks. Stock prices fluctuate widely, in marked contrast to
the stability of (government insured) bank deposits or bonds. This is something that
could affect not only the individual investor or household, but also the economy on
a large scale. The following deals with some of the risks of the financial sector in
general and the stock market in particular. This is certainly more important now that
so many newcomers have entered the stock market, or have acquired other 'risky'
investments (such as 'investment' property, i.e., real estate and collectables

From experience we know that investors may temporarily pull financial prices away
from their long term trend level. Over-reactions may occur— so that excessive
optimism (euphoria) may drive prices unduly high or excessive pessimism may

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drive prices unduly low. New theoretical and empirical arguments have been put
forward against the notion that financial markets are efficient.

According to the efficient market hypothesis (EMH), only changes in fundamental

factors, such as profits or dividends, ought to affect share prices. (But this largely
theoretic academic viewpoint also predicts that little or no trading should take place
— contrary to fact— since prices are already at or near equilibrium, having priced
in all public knowledge.) But the efficient-market hypothesis is sorely tested by such
events as the stock market crash in 1987, when the Dow Jones index plummeted
22.6 percent — the largest-ever one-day fall in the United States. This event
demonstrated that share prices can fall dramatically even though, to this day, it is
impossible to fix a definite cause: a thorough search failed to detect any specific or
unexpected development that might account for the crash. It also seems to be the
case more generally that many price movements are not occasioned by new
information; a study of the fifty largest one-day share price movements in the
United States in the post-war period confirms this.[2] Moreover, while the EMH
predicts that all price movement (in the absence of change in fundamental
information) is random (i.e., non-trending), many studies have shown a marked
tendency for the stock market to trend over time periods of weeks or longer.

Various explanations for large price movements have been promulgated. For
instance, some research has shown that changes in estimated risk, and the use of
certain strategies, such as stop-loss limits and Value at Risk limits, theoretically
could cause financial markets to overreact.

Other research has shown that psychological factors may result in exaggerated stock
price movements. Psychological research has demonstrated that people are
predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact,
just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the
present context this means that a succession of good news items about a company
may lead investors to overreact positively (unjustifiably driving the price up). A
period of good returns also boosts the investor's self-confidence, reducing his
(psychological) risk threshold.[3]

Another phenomenon— also from psychology— that works against an objective

assessment is group thinking. As social animals, it is not easy to stick to an opinion
that differs markedly from that of a majority of the group. An example with which
one may be familiar is the reluctance to enter a restaurant that is empty; people
generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[4] In normal times the
market behaves like a game of roulette; the probabilities are known and largely
independent of the investment decisions of the different players. In times of market
stress, however, the game becomes more like poker (herding behavior takes over).

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The players now must give heavy weight to the psychology of other investors and
how they are likely to react psychologically.

The stock market, as any other business, is quite unforgiving of amateurs.

Inexperienced investors rarely get the assistance and support they need. In the
period running up to the recent Nasdaq crash, less than 1 per cent of the analyst's
recommendations had been to sell (and even during the 2000 - 2002 crash, the
average did not rise above 5%). The media amplified the general euphoria, with
reports of rapidly rising share prices and the notion that large sums of money could
be quickly earned in the so-called new economy stock market. (And later amplified
the gloom which descended during the 2000 - 2002 crash, so that by summer of
2002, predictions of a DOW average below 5000 were quite common.)

Irrational behavior
Sometimes the market tends to react irrationally to economic news, even if that
news has no real effect on the technical value of securities itself. Therefore, the
stock market can be swayed tremendously in either direction by press releases,
rumors and mass panic.

Over the short-term, stocks and other securities can be battered or buoyed by any
number of fast market-changing events, making the stock market difficult to predict.

Stock market index

The movements of the prices in a market or section of a market are captured in price
indices called stock market indices, of which there are many, e.g., the S&P, the
FTSE and the Euronext indices. Such indices are usually market capitalization (the
total market value of floating capital of the company) weighted, with the weights
reflecting the contribution of the stock to the index. The constituents of the index are
reviewed frequently to include/exclude stocks in order to reflect the changing
business environment.

Derivative instruments

Financial innovation has brought many new financial instruments whose pay-offs or
values depend on the prices of stocks. Some examples are exchange-traded funds
(ETFs), stock index and stock options, equity swaps, single-stock futures, and stock
index futures. These last two may be traded on futures exchanges (which are distinct
from stock exchanges—their history traces back to commodities futures exchanges),
or traded over-the-counter. As all of these products are only derived from stocks,
they are sometimes considered to be traded in a (hypothetical) derivatives market,
rather than the (hypothetical) stock market.

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Leveraged Strategies

Stock that a trader does not actually own may be traded using short selling; margin
buying may be used to purchase stock with borrowed funds; or, derivatives may be
used to control large blocks of stocks for a much smaller amount of money than
would be required by outright purchase or sale.

Short selling
In short selling, the trader borrows stock (usually from his brokerage which holds its
clients' shares or its own shares on account to lend to short sellers) then sells it on
the market, hoping for the price to fall. The trader eventually buys back the stock,
making money if the price fell in the meantime or losing money if it rose. Exiting a
short position by buying back the stock is called "covering a short position." This
strategy may also be used by unscrupulous traders to artificially lower the price of a
stock. Hence most markets either prevent short selling or place restrictions on when
and how a short sale can occur. The practice of naked shorting is illegal in most (but
not all) stock markets.

Margin buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes
for it to rise. Most industrialized countries have regulations that require that if the
borrowing is based on collateral from other stocks the trader owns outright, it can be
a maximum of a certain percentage of those other stocks' value. In the United States,
the margin requirements have been 50% for many years (that is, if you want to make
a $1000 investment, you need to put up $500, and there is often a maintenance
margin below the $500). A margin call is made if the total value of the investor's
account cannot support the loss of the trade. (Upon a decline in the value of the
margined securities additional funds may be required to maintain the account's
equity, and with or without notice the margined security or any others within the
account may be sold by the brokerage to protect its loan position. The investor is
responsible for any shortfall following such forced sales.) Regulation of margin
requirements (by the Federal Reserve) was implemented after the Crash of 1929.
Before that, speculators typically only needed to put up as little as 10 percent (or
even less) of the total investment represented by the stocks purchased. Other rules
may include the prohibition of free-riding: putting in an order to buy stocks without
paying initially (there is normally a three-day grace period for delivery of the stock),
but then selling them (before the three-days are up) and using part of the proceeds to
make the original payment (assuming that the value of the stocks has not declined in
the interim).

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New issuance

Global issuance of equity and equity-related instruments totaled $505 billion in

2004, a 29.8% increase over the $389 billion raised in 2003. Initial public offerings
(IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and
IPOs in Europe, Middle East and Africa (EMEA) increased by 333%, from $ 9
billion to $39 billion.

Investment strategies

One of the many things people always want to know about the stock market is,
"How do I make money investing?" There are many different approaches; two basic
methods are classified as either fundamental analysis or technical analysis.
Fundamental analysis refers to analyzing companies by their financial statements
found in SEC Filings, business trends, general economic conditions, etc. Technical
analysis studies price actions in markets through the use of charts and quantitative
techniques to attempt to forecast price trends regardless of the company's financial
prospects. One example of a technical strategy is the Trend following method, used
by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money
management and is also rooted in risk control and diversification.

Additionally, many choose to invest via the index method. In this method, one holds
a weighted or unweighted portfolio consisting of the entire stock market or some
segment of the stock market (such as the S&P 500 or Wilshire 5000). .

"
I. METHODOLOGY

The objectives of the proposal indicate that the study must be

carried out at the micro level. Furthermore, the study will be
carried out both at the theoretical and empirical levels. At the
theoretical level, we will elucidate the concept of inflation and its
measurement. . At the empirical level, the study will be carried
out by using suitable quantitative methods pertaining to
measurement of inflation.
The study will be based on both primary and secondary levels of
information.

II. SAMPLE AND SOURCES OF DATA

Data will be collected from various sources mainly websites

like google.com , wikipedia.com, globalfindata.com,

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BIBLIOGRAPHY

WWW.WIKIPEDIA.COM

WWW.INDIAN STOCK MARKET.COM

WWW.INDIAN ECONOMY.COM

WWW.GDP GROWTH.COM

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