Hints on how to understand and interpret both positives and

negatives for any Capital Market related issues

1. Stock Exchange :
Two sides
A. S.E is considered a barometer of Economy;
B. S.E have become gambling dens.

A. S.E is considered a barometer of Economy :

To promote, develop and maintain a well-regulated market for securities

To safeguard the interests of members and the investing public having dealings on
the exchange
To promote industrial development in the country through efficient resource
mobilization by way of investment in corporate securities
To establish and promote honorable and just practice in securities transactions
It is an integral part of the capital market, which enables business enterprises
whether in private sector or in public sector to raise the necessary financial
resources by providing a market place that brings together the enterprises which
need the money and investors with investable funds
It so doing the stock exchange also imparts liquidity to such investments or an
ability to convert the investments into ready cash at short notice, thereby
encouraging the flow of savings to productive ventures

Primary Market:
Channelising the savings of the society into Corporate Securities
Enabling resource mobilizing by public and Private sector companies
Enable all types of investors seeking different types of instruments for investment
to get appropriate investment choices
Normal form instruments equity Shares, Debt instruments and convertible
issues
Companies use the resource mobilized for new projects / expansion of existing
projects
This will create new Economic and Commercial activity
This will result in development of Infrastructure Sector like Cement, Steel,
Railways, Roadways Sector etc.
Then it will also resulting development of heavy Engineering, Manufacturing
Sector
Additional Employment during construction of the Factory and other facilities

Additional Employment after commencement of Commercial production in the

Factory in Production, Administration and H.R, Finance, Supply chain and
Marketing etc.
Creation of new facilities / addition of new facilities by way of support services
like Schools, Colleges, Hospitals, Shops, Entertainment, Transportation etc.
Results in improvement in the standard and quality of living of the immediate
surroundings
Adds to the wealth of the Nation by way of additional income to the Government
of India by way tax collections under the Heads of Customs Duty, Central Excise,
Sales Tax, Corporate Income Tax and Income Tax on individual employees
incomes
Amount collected under IPOs over the years is as follows

Fund Generated Through IPOs

Year
1993 - 94
1994 - 95
1995 - 96
1996 - 97
1997 - 98
1998 - 99
1999 - 2000
2000 - 01
2001 - 02
2002 - 03
2003 - 04
2004 - 05
2005 - 06
2006 - 07
2007 - 08

No. IPOs
692
1239
1357
717
52
18
51
114
7
6
21
23
79
77
85

Amount(crore)
7864
16572
10924
5959
1048
404
2719
2722
1202
1039
3434
13749
10936
28504
42595

Secondary Market:

The S.Es provide liquidity to the investors and instruments created in the primary
market.
A vibrant secondary market is pre requisite for a robust primary market
Investors who have invested in different primary market instruments have to be a
provider an exit route whenever they want to get out of investments, for what ever
reasons
New investors how to be enabled to acquire the instruments created in the primary
market at a later stage
Investors who have been allotted instruments in the primary market are enabled
to add to their investments by buying additional quantities
2

Secondary market provides transparent pricing mechanism by taking into account

existing financial performances and future financial performance of the company
Demand and Supply form the basic criteria for the a price formation
This enables price discovery price continuity and price formation
The closing market price of a security is considered a fair indication of the value
of the company
The price is a result of investor behavior, and investor sentiment resulting from
actions of bulls (optimists) and bears (pessimists)
The increasing secondary market turnover indicates the vibrancy of the Stock
market Trading System
The present Settlement Cycle of T+2 almost equates cash and securities
This is on par with all developed Capital Markets in the World

Share Indices:

Share Indices provide a yard stick to the insiders and outsiders about the health of
the Capital Market
Since Capital Market is indicator about the general economic health and well
being of the country, Share Indices play a major role
Indian Stock Exchanges have powerful brand Indices like SENSEX and NIFTY
We also have Indices which are more broad based like BSE 100, BSE 200, Nifty
Junior, Nifty Mid cap, Crisil 500 etc.
On account of the above arguments, it can be safely concluded that S.Es are barometer of
an economy

B. S.Es have become gambling dens:

The screen base trading system has brought about total transparency into
secondary market trading system
It has also decentralized geographically the Indian Capital Market from the
trading hall of BSE to trading terminals across India
Worth of National Stock Exchange by way competition to BSE has brought about
lot of positives to the system
Capital Market being very specialized type of industry requiring huge capital
investments and also having entry barriers, does not allow new persons get into
the industry confidently
Hence most of the NSE members are the existing members BSE
They have invest additionally by way of membership fee, capital adequacy norms
of NSE
This additional capital deployment will not get any return from NSE by way of
interest
The members will have to earn by way of business income from their trading
activities only
The screen based system has resulted in huge reduction in the brokerage charges

The transparent trading system results in the prices at which trading takes place to
all the market participants simultaneously
Where ever trading volumes are high that indicates good amount of Day Trading
taking place
This indicates that the quantity of shares bought and sold are equal, resulting in no
delivery obligations
The Endeavour of the trader will be that his sales price is more than his purchase
price, which will result in his earning profits from the trading
It results in four different prices on any day for actively trader scripts i.e opening
price, closing price, highest price and lowest price
The difference in prices between the highest and the lowest may be quite high in
some counters
The natural tendency of a day trader will be to sale some quantity of shares at the
highest price and buy back the same quantity of shares at lower price the same
day, thereby a minting lot of profits
The price formation of any share in the secondary market is function of Micro
Economic factors relating to the company, Macro Economic factors relating to the
Industry and policy issues of Government and Global factors
While the price difference provides a good opportunity for the day trader to make
profits, it becomes very challenging and difficult to correctly predict the trends
and change in trends of price behavior correctly because its a function of
economic factors and behavioral factors
The S.E members need trading volumes to earn business income from their
broking business which technically creates the ROI for them
When ever the investors make profits, they take the money outside the system
In their attempt to do day trading, many market participants try to identify the
counter where they will indulge in day trading, quantity of shares and the nature
of first transaction i.e. they will go long or they will go short
It is quite possible that they may succeed initially and make profits
They get emboldened by this and try to increase the quantity of shares as well as
the no. of companies where they indulge in day trading
Its quite possible that the price movements may not be as per what the day
traders wish or as their predictions. It may go in the reverse direction, where by
they end up making huge losses instead of profits
As the settlement cycle is T+2, the losses have to be made good by inflow of fresh
cash on next day itself
It is quite possible that many day traders may not be aware of their risk bearing
capability and expose themselves to undue risk much beyond their capability and
there by will have commitments which they cannot meet not only by next day but
can never be met
This opens up in the pandoras box
Many investors feels that it is a treasure they have lost and indulge in further day
trading (speculative trading) under the principle that profit have to be searched in
a place where they have lost it i.e. Secondary Market.
4

From a brokers point of view, all these transactions add to the trading volumes
and there by resulting in brokerage income
While they encourage speculative trading as this will give them brokerage
income, the losses made by the day traders have to be made good by the broker
whether the customer gives the money or not.
The above arguments goes to show that the Stock Exchanges are also becoming gambling
dens.