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Term Research Project

On

“Volatality in Indian Stock Market”

Submitted To: Prof. Sampada S. Kapse

In Partial Fulfillment of the subject:


“Indian Financial System”
Of SEM – 3 PGDM
Batch: 2008-10
Submitted By: Group No.

Sr. No. Name Roll No.

1. Manish Bhatia 08064


2. Savitri Fufal 08073
3. Ravi Majithiya 08085
4. Deep Pathak 08099
5. Hardik Zala 08105
6. Vivek Soni 08107
7. Pratik Tanna 08108
Table of Contents

Sr. No. Particular Pg. No.

1. Introduction 1
Definition
Types of Trends
2. Littereture review
3. Objectives
4. Methodology
5. Factors afecting the Volatality
6. Analysis
7. Findings
8. Comments
9. Suggesion
10. Bibliography

Introduction:

First we will define, What is a Stock Market ?


In the stock market world, you need a way to compare the movement of the market, up
and down, from day to day, and from year to year. An index is just a benchmark or yardstick
expressed as a number that makes it possible to do this comparison. For e.g. S&P CNX Nifty is
the index of NSE and SENSEX is the index of BSE.

Stock exchanges to some extent play an important role as indicators, reflecting the
performance of the country's economic state of health. Stock market is a place where
securities are bought and sold. It is exposed to a high degree of volatility; prices fluctuate
within minutes and are determined by the demand and supply of stocks at a given time.
Stockbrokers are the ones who buy and sell securities on behalf of individuals and institutions
for some commission.

The Securities and Exchange Board of India (SEBI) is the authorized body, which
regulates the operations of stock exchanges, banks and other financial institutions. The past
performances in the capital markets especially the securities scam by Harshad Mehta has led
to tightening of the operations by SEBI. In addition the international trading and investment
exposure has made it imperative to better operational efficiency. With the view to improve,
discipline and bring greater transparency in this sector, constant efforts are being made and to
a certain extent improvements have been made.

As the condition of capital markets are constantly improving, it has started drawing
attention of lot more people than before. On the career related aspects, professionals have
opportunities to choose from for a wide range of jobs available in a number of organizations
in this sector and one can expect to have good times ahead of him.

Securities market has essentially three categories of participants, namely the issuer of
securities, investor in securities and the intermediaries and two categories of products,
namely the services of the intermediaries, the securities including derivatives.

The security market has two interdependent and inseparable segments, the new issues
(Primary market) and the stock (secondary market). The primary market provides the
channel for sale of new securities while secondary market deals in securities previously
issued.
There are so many script or stock traded in indian stock market and all stocks are
distributes in Small cap, Mid cap, Sensex, Nifty 50, Bse 200, Bse 500 and Bse 100.

Definition:

“Volatality”, It is a very small word but its meaning was very big, it means a
fluctuation. The fluctuation is not one side movement it can be go anywhere either bullish,
bearish or flat. Here we discuss about the Volatality in the Indian Stock Market. Volatility
is the word define it self a fluctuation in the capital market.

How we decide the trend of the market or particular stock

By two way we can check the market or stock that It is bullish, bearish or flat.

Technical analysis and fundamental analysis are the two main schools of thought in
the financial markets.

• Technical analysis looks at the price movement of a security and uses this
data to predict its future price movements.

• Fundamental analysis, on the other hand, looks at economic factors, known


as fundamentals.

Let's get into the details of how these two approaches differ, the criticisms against
technical analysis and how technical and fundamental analysis can be used together to
analyze securities.

Types of Trends:

• Bullish Trend
• Bearish Trend

• Flat Trend

1. Bullish Trend:

2. Bearish Trend:

3. Flat Trend:
Literature review:

This gap in the literature and examine the effects of exposure to foreign markets
on volume, volatility, liquidity of stocks in the domestic markets. Yet they are not clear how
the volume affects the Indian stock market.

There are so many evidences e.g. Aamihud (2002), Datar (1998) etc., in the
literature that there exist a positive relationship between return and liquidity. If return & risk
are positively related then risk and liquidity is expected to have a positive association.
Admati and Pfleiderer (1988), Foster & Viswanathan (1990) also predict positive relation
between illiquidity and volatility. So a negative relation between liquidity and risk is
expected.

We are describing about the supply and demand in the market that affects the
Indian stock market. As they move towards the fluctuation. As it is common the more the
purchasing in the market the more the price of the share goes up as less the price the price of
the share goes down. Our research shows that the improvement in the volume the stock prices
goes up the more the foreign capital the improvements in the liquidity of their equity traded
on the Indian stock market. We will see that the firm raising its capital by the improvements
of the liquidity in the stock market.

Raising capital allow the people to invest in a firms shares could result in positive
changes. This provides a verification affect that increase the value of the firm equity.

Moel (2000) analyzes the effect of ADR listings from emerging markets on three
aspects of development. Openness, liquidity and growth- in the home market. Accounting
disclosure standards are used to proxy for openness of the market while liquidity is measured
using the share turnover of the firms. He uses a sample of firms from 28 emerging markets
and uses annual data to measure changes in openness, liquidity and growth.

Moel that suggest the firms that raises capital do not see significant improvement to
the liquidity of their equity traded securities. They particular found of more of the foreign
investment securities invested in local market. We found of that the firms raising capital the
foreign capital-raising event. Lower volatility of underlying assets returns implies lower
inventory reduced possibility of informed trading. Declining spreads and volatility of spreads
therefore imply better liquidity in the market.

Pagano , Chowdhry and Nanda and Domowitz, Glen and Madhavan show that the
effect of cross-listing a firm.s shares is not unequivocally value improving. In Domowitz,
Glen and Madhavan (1998), cross-listing of shares on the domestic and a foreign market
increases total number of trades and results in improved liquidity and firm value, only if
markets are linked. If information is not freely available, volume will flow to the country.
Nanda and chowdary that one of the markets will emerge as the dominant market, which will
attract the informed and liquidity traders. Hence, the volume of trade in the domestic market
could decline. For these reasons, it is not clear that firms are unconditionally better off
subsequent to foreign capital-raising.

We are mainly focused on the domestic market so we will see how the bullish and
bearish factors that play a dominant role in the stock market. As we also focused on the
technical analysis and charts and volume liquidity that affects the Indian stock markets and
more of the local investors that traded in these securities as they are the biggest investors and
FII has the only 28% of investment in the market. And we will focused on FII also how they
technical analysis say about them.
Objectives:

• To understand the suppy and demand which affect the market and create the volatality
in the Market.

• Bulish and Bearish factors affecting the stock market.

• Is that correct time to invest in Indian Stock Market ?

Methodology:

Primary Data:

1. Supply and Demand which plyas a very vital Role in to the Market and create
more fluctuation in to the market.

Secondary Data:

2. Factors affecting the Indian Stock Market.

• Political Factors
• Global Factors

• Oil Prices

• FII

• Disinvestments

FII supply and demand play a very vital role in the stock market volatility

The sebi has permitted the foreign institution investors to invest 30% of the
investment in secondary market and they had just 24% of investment in our stock market.
Foreign portfolio investment further classified into ADR/GDR,

We then examine the benefit, if any, to firms that seek foreign exposure by comparing
them to firms that choose to list their shares on the Indian market alone. Next we compare
both sets of firms - i.e. firms raising capital on global markets with those raising capital solely
on the domestic markets - by controlling for firm value and risk. Hence the results of the
study shed light on the direction of the changes for firms that raise capital abroad.
There are forty-nine equity issues by Indian firms in foreign markets during the
period. These issues represent firms that are simultaneously raising capital at home (on the
Indian market) and one or more foreign market.
Instead of going into in details in each view/theory of stock market movement, only a
few studies using at least spread or any of the two basic components of spread (i.e. E/P ratio
and interest rate) are discussed here. the performance of various portfolios on the basis of
their P/E ratios and found that return on company stocks with low P/E ratios was
significantly higher that the return on companies with relatively high P/E ratios . several other
influential variables for explaining stock market movements.
Despite the significant development on the macro indicators of the Sensex, the micro
indicators like the average Sensex P/E ratio and the average Return on Sensex reflect a
moderate impact of FIIs. The average Sensex P/E ratio has marginally declined and the
average Return on Sensex has widely fluctuated over the period April-June 2001 to January-
March 2005.Further, it can be noticed from Table 2 that out of the sixteen quarters/eight
quarters show negative results on sensex, despite 14 quarters of net positive inflows by FIIs.
This suggests that for the negative returns on Sensex other participants in the stock market
are largely responsible for the outcome.46 February 2006 Another important measure of FIIs
impact on Sensex is the movement and comparison between volatility and return on Sensex.
The movement of returns and volatility suggests an inverse relationship. It can be observed
from Graph 4 that movement of the returns on Sensex and volatility is not only cyclical but it
is notable that the peak of the former coincides with the trough of the latter and vice-versa.
The 48 monthly data on net FII inflows and volatility shows negative correlation. Despite
being significant it suggests a higher net FII inflow would lessen the volatility in the Sensex.
With respect to net FII inflows and Returns on Sensex, the time series data for 48 months
shows a positive and significant correlation. Further analysis of changing pattern in the
performance of the companies listed in the sensex and their returns, can be observed from,
where the number of companies registering net positive returns during the quarters has
increased four times from April-June 2004 to January-March 2005.During the same period
the number of companies whose returns have fluctuated more than –5% and less than –10%
have declined three times. This indicates a positive
Development attributed to FIIs increase in the stakes in the equity holding of Sensex
Companies. One of the notable features is the spillover benefit of the structural reforms and
the FII’s emerging presence in the stock is the percentage of delivered value to total turnover
and turnover ratio. It can be observed from Table 5. The percentage of delivered value to total
turnover has steadily increased from April-June 2001 to January-March 2005. The increase in
delivery percentage indicates lower speculative activity and vice-versa. Further, the turnover
ratio (trading volume divided by market capitalization) on the equity spot market has also
steadily declined over the corresponding period. This suggests that in future, the headroom
for growth in spot market turnover in India will come from the growth of economy and
market capitalization.
Stock Markets Fluctuation:

In January the Indian Stock Markets tumbled under pressure as the Mumbai Stock
Exchange Index (SENSEX) fell from a
1500
high of 21000 points (on 11th January) to 1000

below 17500 points (on 21st January). 500


0
The market weakened following reports -500 Jan Jan Jan J an Jan F eb F eb F eb
21st 22nd 23rd 25th 28th 1st 4th 5th
of a sluggish trend in international -1000
-1500
markets due to rising concerns of
-2000
recession in the world's biggest economy,
the US. Pressure grew due to the triggering of margin calls as traders/institutional investors
started unwinding their positions. The markets though have now to some extent recovered
(mainly thanks to some aggressive government intervention).
In the last 51 months, there was more than USD 49 billion of FII investment the
Indian stocks compared to the USD 25 billion of foreign direct investment (FDI) during the
same period. Between January and November 2007 foreign funds bought Indian shares worth
19 billion dollars, which is significantly ahead of the full-year record of about 11 billion
dollars (in previous calendar year). During this period the Indian stock market, represented by
SENSEX, grew by 290 per cent, with the SENSEX PE at 22.4. After the correction the PE
stood at 17. The central bank has time and again cautioned against overheating in the capital
markets and real estate sectors.
Factors afecting the Indian Stock Market:

FII:

The BSE Sensex, India's benchmark equity index, has doubled in value since the lows
of 9 March, the fastest such surge since the early 1990s when economic liberalization and
speculator Harshad Mehta boosted it to dizzy heights. Between December 1991 and April
1992, the Sensex more than doubled, from 1,900 to 4,460, before crashing. And it shows the
Bullish Trend at that time. Even the relatively broader 50-stock Nifty index has risen
90.21% since 9th of March. The Nifty came into existence from April 1996.

The sharp rise in both the indices since March 9 makes India the best performing
market amongst the emerging countries, next only to Vietnam. The two stimulus packages by
government to push the economy back on a growth path, and return of a stable government at
the centre in May this year have been key drivers to lead the bullish trend in stock market.

It may be highlighted that even the US stock markets, which slipped at a fast pace
consequent to the global financial crisis one year back, have recovered close to 50 per cent
subsequent to March 9, when the Wall Street indices bottomed out.

After Tuesday's rally, the Sensex has gained 101.64%, the second fastest among
major emerging markets, surpassed only by Vietnam's Ho Chi Minh index, which gained
124.6% during the same period.

The trigger on Tuesday was higher advance tax payments by companies for the
September quarter, which boosted investor sentiment and pushed the benchmark index to a
15-month high.

The rise from 8,000 to 16,000 levels has been much faster than the drop from 16,000
to 8,000 between June 2008 and March 2009.

The economic stimulus not only brought money back into the system but also boosted
hopes of an early economic recovery, which led to a revival of risk appetite among investors.

In the return to growth path of economy followed by a bullish undertone in the stocks
in country, foreign institutional investors, the largest investor category in local equities, have
bought Indian stocks of over $10 billion since March. Prior to that, FIIs took out $12.87
billion from the Indian market in 2008 and early part of this year.

Oil price:

Oil prices extended a terrible influence on he stock market in the 1970s and 1980s and
we are experiencing the same thing now. Some have speculated that cruid oil prices could hit
$ 100/ barrel in one to two years if events fall into place just right. A couple of factors are
driving oil prices, like continuing increase in worlswide demand for oil. Any messive
increase or decrease in crude oil has its impact on the condition of stock markets in through
out the sorld. The stock exchanges of everycountry keep a close eye on any up and downward
movement of the crude oil price.

There exist an inverse relationship between oil prices and equity markets. An increase
in the oil prices leads toa nose dive in the stock market and vise-a-versa. Market
commentators and journalist like to drow direct lines between the behavior or crude oil prices
and market behavior onf crude oil prices and market behavior on a given day, with such
headlines as “Oil Spike Pummels Stock Market ” (Wall street Journal) or “U.S. Stocks Rally
as oil Prices Fall” (Finance Times).

But does a change in oil prices affect the overall stock market in any predictable
meaningful way? Any movement in the oil prices results in uncertainty in the stock market.
Higher the oil prices, higher the transportation, production and heating costs.

There will be great combination of crude & stock market since major world economy
are based on crude and US dollar. If you look at past Indian stock market has started shooting
up around May 2003 to Dec 2007. As per statistics around 550% gain has been registered on
monthly closing levels which has come down to 270% if we take 52 weeks levels. Now look
at crude oil statistics cruid oil has started its upward journey from US $ 25 in April 2003, in
dec 2007 it was below $ 100 and gone up its all time highest levels $ 146 in july 2008 still
Indian Stock market was keep shooting up like rocket till dec.

Political Factor
Political instability is always bad for the stock market. Political instability in any
country affects the markets. The current year we have experience ups and down because of
the news/rumors of the instability of the present Dr.Manmohan government. The survival of
the government was under the question due to nuclear deals. Markets reacted very strong and
looking to the volatility in the stock market the finance minister has to come in front of the
media to retain the confidence of the investor.

Slow sign of recovery

There is no sign of recovery inspite of the fact crude oil has slipped near four year
low.mcx crude oil December contract continued to trend lower following the global trend.
The contract was last traded as Rs 2315 a barrel-down 3.4%.

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