A

SEMINAR REPORT

ON

“Stock Market DevelopmentAnd

Growth in India”

Submitted in partial fulfillment for the

MASTER OF BUSINESS ADMINISTRATION2nd SEMESTER (2008-2010)

Under the Supervision to:- Submitted by:- Prof . Ashwini Agrawal Richa Trivedi

M. B. A. (Semester 2nd)

G.D. MEMORIAL COLLEGE OF MANAGEMENT &

TECHNOLOGY

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Acknowledgement

I express my sincere thanks to my project guide, Prof. Ashwini Agrawal

Designation Director, Dept. of Management, for guiding me right from the

inception till the successful completion of the project. I sincerely acknowledge him

for extending their valuable guidance, support for literature, critical reviews of

project and the report and above all the moral support he/she/they had provided to

me with all stages of this project.

I would also like to thanks the supporting staff Mr. Ashish Asopa, Miss Sheetal

Soni, Miss Ritu Khokar and Miss Divya Khatri Department, for their help and

cooperation throughout our project.

Richa Trivedi

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Contents:

1. Introduction………………………………………………………………..42. Stock Market in India……………………………………………………...43. Trading……………………………………………………………………..54. Market Participants………………………………………………………..65. Importance of Stock Market………………………………………………7

i) Function and Purpose………………………………………………7ii) The stock market, individual investors, and financial risk…………...8

iii) The behaviour of the stock market…………………………………..8

iv) Irrational behaviour…………………………………………………..9

v) Stock market index………………………………………………….10

vi) Derivative instruments……………………………………………...10

vii) Leveraged strategies………………………………………………..11

viii) Short selling………………………………………………………...11

ix) Margin buying……………………………………………………….11

6. Types of Stock……………………………………………………………..12

Common stock………………………………………………………..12

Preferred stock………………………………………………………..12

Convertible preferred stock…………………………………………..12

7. Function of stock exchange Issuing Stock…………………………………………………………….12

8. Type of investor according to their risk taking behaviour………………13

I. Conservative…………………………………………………………13

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II. Moderate-conservative………………………………………………14

III. Moderate…………………………………………………………….14

IV. Moderate-Aggressive………………………………………………..14

V. Aggressive…………………………………………………………...14

9. Year 2006 at a glance…………………………………………………….1510. An overview of year 2006………………………………………………..1611. Year 2007 at a glance…………………………………………………….1812. An overview of year 2007………………………………………………..2013. Sensex during year 2008…………………………………………………2314. Reasons for the present slowdown………………………………………2415. Conclusion………………………………………………………………..26

Introduction:

A stock market, or equity market, is a private or public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market is estimated at about $36.6 trillion US at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. 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. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). 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 the organizations to a listing of stocks and securities together. The

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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.

Stock Market in India

There was a time when India was discussed as the land of snake charmers, black magic and epidemics but the revolutionary Indian growth story changed everything. Indian economy at its height compelled the world to change its viewpoint towards India. Out of the several factors which changed the face of modern India, we are going to discuss the most roaring of them i.e. our share market. The earlier reform procedures adopted by India gave India the two most sought after world-class brands i.e. SENSEX and NIFTY. The magical figures displayed by our market turned all the heads on India. And India became one of the most favoured places for investment.Now we are going to deal with the ups and downs in the share market since last two years i.e. since year 2006.our share market has went through many phases in there 2 years. We saw the investors getting overjoyed at 21K and we saw them crying too when it crashed. We saw how the market rewarded the undervalued shares and how the overvalued shares fell down to demonstrate the saying, “everything which raise more than expected, has to fall.” So to analyze the saga of Indian share market, we had two indices to follow: BSE sensex and NSE nifty. Though NSE nifty is a more advanced option and has left BSE sensex far behind, still we call BSE sensex as the barometer of our economy. That’s why we have followed the BSE sensex. It was not possible to track each and everyday figure of the sensex since last two years. The performance of the sensex is analyzed with the help of data and graphs collected from various sources and some of the most talked about movements of sensex starting with the secondary.

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Trading

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 stock 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 floor broker, who goes to the floor trading post specialist for that stock to trade the order. 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".

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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.

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, index funds, exchange traded funds, hedge funds, investor groups, banks and various other financial institutions). 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.

Importance of stock market

1. Function and purpose

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. 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

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mood. An economy where the stock market is on the rise is considered to be an upcoming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. 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 behaviour 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 well as employment. In this way the financial system contributes to increased prosperity.

2. 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).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it

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increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett. Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st century.

3. The behaviour of the stock market

From experience we know that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets.) Over-reactions may occur—so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have since been put forward against the notion that financial markets are 'generally' efficient (i.e., in the sense that stock prices in the aggregate tend to follow a Gaussian distribution).

In one paper the authors draw an analogy with gambling. 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 behaviour takes over). 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 1987 crash, less than 1 percent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 bear market,

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the average did not rise above 5%). In the run up to 2000, 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 bear market, so that by summer of 2002, predictions of a DOW average below 5000 were quite common)

4. Irrational behaviour

Sometimes the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the technical value of securities itself. But this may be more apparent than real, since often such news has been anticipated, and a counteraction may occur if the news is better (or worse) than expected. Therefore, the stock market may be swayed in either direction by press releases, rumours, euphoria and mass panic; but generally only briefly, as more experienced investors (especially the hedge funds) quickly rally to take advantage of even the slightest, momentary hysteria.

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 behaviour difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally obscure. Behaviourists argue that investors often behave 'irrationally' when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money. However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationally determined.

The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11 percent, this occurred on October 13, 2008.

5. Stock market index

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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 Euro next indices. Such indices are usually market capitalization 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.

6. 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.

7. 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.

8. 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

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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.

9. 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.

Types of Stock

Common stock

As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions

Preferred stock

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It typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders

Convertible preferred stock

It is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date

Function of stock exchange .

Issuing Stock

Businesses issue stock to raise money. They use this money to finance expansions, pay for equipment and fund projects, etc. Corporations issue stock when they may need additional capital to operate successfully. The fancy term for issuing stock to raise money is equity financing. The money received from investors who buy stocks is called equity capital. In the world of securities, the word “equity” usually refers to stocks. The other method of raising money is debt financing, which involves selling bonds. When companies make profits, they may reward their stockholders with pieces of their profits, known as dividends. Dividend Investors may purchase stock on the primary or secondary market. A company sells its stock to the public on the primary market through its initial public offering. The primary market is the market in which investors have the first opportunity to buy a newly issued security. Investors may sell their shares through brokers to other investors on the secondary market. The secondary market can be structured as an auction market, such as the New York Stock Exchange (NYSE), or a dealer market, such as the National Association of Securities Dealers AutomaticQuotation System, called NASDAQ. Stock prices (quotes) can be found in newspapers, on television and the Internet. Stock exchanges are the physical locations where stocks are bought and sold. The over-the-counter (OTC) market refers to a market in which securities transactions are conducted through a telephone and computer network connecting dealers in stocks and bonds, rather than on the floor of an exchange.

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Together, these two markets (stock exchange and OTC) form the secondary market. The primary and secondary markets together make up the stock market. Exchanges are located all over the world, with the most famous one being the New York Stock Exchange.

Type of investor according to their risk taking behaviour

Conservative

Investment objective: Preservation For investors who are primarily interested in preserving their investment

principal.

Investors who choose this model seek low volatility and a low probability of capital loss.

Future growth of income and principal are of minor importance

Short investment time horizon and low tolerance for big fluctuations in current income.

Moderate-conservative

Investment objective: Conservative For investors who seek moderate capital appreciation.

Investors who choose this model are comfortable with only limited swings in the annual returns earned on their portfolios.

Emphasis on providing a high level of current income

Future growth of income and principal are secondary objectives.

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Moderate

Investment objective: Balanced growth For investors who seek higher potential growth with relatively stable capital

appreciation.

Investors who choose this model feel that maximizing returns is equally important to minimizing risk.

Approximately equal emphasis on current income and potential for future appreciation and income growth.

Moderate-Aggressive

Investment objective: Capital growth For investors who seek high potential growth.

Investors who choose this model are willing to accept an above-average risk in exchange for greater potential gains.

Aggressive

Investment objective: Aggressive growth For investors who want to build significant wealth over time and are willing

to accept greater risk to do so.

Investors who choose this model will tolerate large market fluctuations in value in exchange for potentially greater returns.

Emphasis on future appreciation, not current income;

Year-to-year principal stability is not important.

Year 2006 at a glance: In the secondary market, the uptrend continued in 2006-07 with BSE indices closing above 14000(14,015) for the first time on January 3, 2007. After a

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somewhat dull firsthalf conditions on the bourses turned buoyant during the later part of the year with large inflows from Foreign Institutional Investors (FIIs) and larger participation of domestic investors. During 2006, on a point-to-point basis, Sensex rose by 46.7%.The pickup in the stock indices could be attributed to impressive growth in the profitability of Indian corporate, overall higher growth in the economy, and other global factors such as continuation of relatively soft interest rates and fall in the international crude prices. BSE Sensex (top 30stocks) which was 9,398 at end-December 2005 and 10,399 at end-May 2006, after dropping to 8,929 on June 14, 2006, recovered soon thereafter to rise steadily to 13787 by end-December 2006.According to the number of transactions, NSE continued to occupy the third position among the world’s biggest exchanges in 2006, as in the previous three years. BSE occupied the sixth position in 2006, slipping one position from 2005. In terms of listed companies, the BSE ranks first in the world.In terms of volatility of weekly returns, uncertainties as depicted by Indian indices were higher than those in outside India such as S&P 500 of United States of America and Kospi of South Korea. The Indian indices recorded higher volatility on weekly returns during the two-year period. January 2005 to December 2006 as compared to January 2004 to December 2005 the market valuation of Indian stocks at the end of December 2006, with the Sensex trading at a P/E multiple of 22.76 and S&P CNX Nifty at 21.26, was higher than those in most emerging markets of Asia, e.g. South Korea, Thailand, Malaysia and Taiwan; and as the second highest among emerging markets. The better valuation could be on account of the good fundamentals and expected future growth in earnings of Indian corporate Liquidity, which serves as a fuel for the price discovery process, is one of the main criteria sought by the investor while investing in the stock market. Market forces of demand and supply determine the price of any security at any point of time. Impact cost quantifies the impact of a small change in such forces on prices. Higher the liquidity, lower the impact cost.

SENSEX during 2006:

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An overview of year 2006:

During December 2005, the greatest demerger of Indian history between the Ambanis paved the way for 9000. And the sensex entered the year 2006 with a 9000 + figure. On Feb. 10th 2006, we saw two roaring figures, both sensex and sachin tendulkar crossing 10000 mark. But the reason behind roaring sensex was not sachin’s records rather it was rallied by strong FII inflows and robust data. The government forecasted a GDP growth of 8.1% in current year, with manufacturing and the agriculture sectors estimated to grow at 9.4% and 2.3% respectively. The 238-point rally was contrary to expectations as it came despite negative news flow about a fresh tussle between Ambani brothers over transfer of ownership of the four companies demerged from erstwhile RIL.Sensex’s surge to 11000 points on 21st march 2006 was prompted by PM Manmohan Singh’s announcements on Capital Account Convertibility. On Saturday, Prime Minister Manmohan Singh hinted at moving toward a free float of the rupee and on Tuesday, the BSE responded by crossing the 11,000 mark in a lifetime intraday high. The new trading high was reached 29 days after Sensex entered the elite 10,000 club on February 6. Only Nikkei, Hang Seng and Dow Jones could boast of being above 10,000 at that time. Since full convertibility was

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2006 BSE

Jan 9920

Feb. 10370

Mar 11280

Apr 12043

May 10399

Jun 10609

Jul 10744

Aug 11699

Sep 12454

Oct 12962

Nov 13696

Dec 13787

expected to attract more foreign money and also allow local companies to tap foreign debt markets more easily, it was evident that the move will encourage investors and boost the confidence of the markets. RBI said it constituted a panel to thrash out the contours for full convertibility. Although the index later ended lower with investors wanting to book gains, participants said it was evident the markets had sent out a message - that the growth story of Asia’s third largest economy is intact and that liquidity flows into the bourses would continue to remain firm. After hitting a high of 11,017.25 points in mid-afternoon trade, Sensex lost 35.91 points to close at 10,905.20, fluctuating 153 points, with most of the volatility coming in the last hour of trading. The rise in share prices was partly attributed to a fall in oil price. The US April crude oil prices plunged 3.7% or $2.35, to settle at $60.42 a barrel, on the New York Mercantile Exchange due to sample US inventories. After falling by 307 points on 12th April 2006 on account of Heavy selling by FIIs in both cash and futures markets and a move by stock exchanges to raise margins on share transactions by about 250 basis points, the 131-year-old BSE on Thursday, April 20, 2006 crossed yet another milestone when it breached the 12,000-point mark, backed by strong corporate earnings, higher liquidity and robust economic growth. The index was being driven by the strong flow of liquidity. Earlier, it was based on the expectations that (corporate) results would be great and by the first few companies was more than matching those expectations. Although, Sensex was beaten to the 12,000 mark by various global indices, the time it took to breach this milestone has been one of the fastest. Traders point to the fact that foreign investors, buoyed by a booming economy, have chosen India as one of their top investment destinations.Now, everything was going fine perhaps it was the lull before the storm. Suddenly the Dalal Street experienced its worst single day crash on Thursday, 18th may 2006 as an ambiguous Government circular on taxing investment gains prompted foreign funds to book profits, knocking the bottom off the jittery stock market. Opening amidst weak global markets and reports of rising US interest rates, the BSE-30 Sensex went on to close 826.38. However the Dealers said the fall was accentuated by large-scale selling of client positions by broking firms due to margin calls or the lack of margins. In May, crash saw the Sensex shedding its market capitalization by as much as 14% in just one month.

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Benchmark stock indices vaulted to new highs on Monday, Oct. 30 th 2006 driven by a heady cocktail of strong corporate earnings, a rapidly growing economy and relatively stable crude oil prices. The Sensex ended at its highest closing level of 13024.26, a gain of 117.45 points or 0.9%.Marauding bulls defied the weak trend globally, which was sparked off by weak US GDP growth figure, pointing to a slowdown. Back home, the mood was upbeat even as some expect that the RBI may raise interest rates by 25 basis points in its mid-term credit policy on Tuesday. Market watchers said sentiment could be affected only if the hike is more than 25 basis points, which is unlikely. Higher interest rates drive up borrowing costs for corporate as well as the retail consumer, who could then cut back on their investments and spending, in turn causing a slack in domestic demand.The benchmark 30-share sensex briefly crossed the psychological 14,000-mark on Tuesday, December 5, 2006. While foreign institutional investors have been aggressive buying stocks over the past few months, the response of domestic mutual funds has been guarded. In the last two months alone, FIIs bought net stocks worth Rs 17,001 crore while local mutual funds have pumped in a net Rs 638.07 crore.

Year 2007 at a glance:

In the secondary market segment, the market activity expanded further during 2007-08 with BSE and NSE indices scaling new peaks of 21,000 and 6,300, respectively, in January 2008. Although the indices showed some intermittent fluctuations, reflecting change in the market sentiments, the indices maintained their north-bound trend during the year. This could be attributed to the larger inflows from Foreign Institutional Investors (FIIs) and wider participation of domestic investors, particularly the institutional investors. During 2007, on a point-to-point basis, Sensex and Nifty Indices rose by 47.1 and 54.8 per cent, respectively. The buoyant conditions in the Indian bourses were aided by, among other things, India posting a relatively higher GDP growth amongst the emerging economies, continued uptrend in the profitability of Indian corporate, persistence

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of difference in domestic and international levels of interest rates, impressive returns on equities and a strong Indian rupee on the back of larger capital inflows. The BSE Sensex (top 30 stocks) too echoed a similar trend to NSE nifty. The sell-off in Indian bourses in August 2007 could partly be attributed to the concerns on the possible fallout of the sub-prime crisis in the West. While the climb of BSE Sensex during 2007-08 so far was the fastest ever, the journey of BSE Sensex from 18,000 to 19,000 mark was achieved in just four trading sessions during October 2007. It further crossed the 20,000 mark in December 2007 and 21,000 in an intra-day trading in January 2008. However, BSE and NSE indices declined subsequently reflecting concerns on global developments. BSE Sensex yielded a Compounded return of 36.5 per cent per year between 2003 and 2007. In terms of simple average, BSE Sensex has given an annual return of more than 40 per cent during the last three years.

Sensex during 2007:

2007 BSE

Jan 14091

Feb 12938

Mar 13072

Apr 13872

May 14544

Jun 14651

Jul 15551

Aug 15319

Sep 17251

Oct 19838

Nov 19363

Dec 20287

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An overview of year 2007:

After touching 14K mark on December 5th 2006, sensex entered into 2007 with a promising figure of 14000+, though the year started on a rather tentative note with a marked slowdown being observed in the FII inflows into the country. The inflows received from FIIs in January and February 2007 was 48 per cent less than what was received during the same period in 2006. The return provided by the BSE Sensex for 2007 turned into negative territory following the 389-point tumble on Friday, February 23rd; the year-to-date return generated by the Sensex was negative 0.97 per cent.FIIs have pressed substantial sales over those days in contrast to an intermittent surge in inflow in February 2007. As a result, the sensex which closed at 14091 on January 31st closed at 12938 on February 28th.As per provisional data FIIs were net sellers to the tune of Rs 613 crore on Friday 2 March, the day when Sensex had lost 273 points. Their net outflow was worth Rs 3080.80 crore in four trading sessions from 26 February to 1 March 2007. Market continued to reel under selling pressure on 5 th march 2007 taking cue from weak global markets and heavy FII sales as a result of fall over 400 points, all the indices were in red.On April 24th, The Sensex again crossed the 14K mark and was trading at 14,150.18 having gained 221.85 points or 1.59%. The midcap and smallcap indices were rather moving slow indicating that the actual movers are the large cap stocks but at the month end it finally closed at 13872. Further we can see May and June having month end figures at 14544 and 14651 respectively.The benchmark BSE 30-Share Sensitive Index (Sensex) breached the 15,000-mark, to reach a record high of 15007.22, for the first time intra-day on Friday, July 06 2007 before closing at 14964.12. Despite weak global cues, Indian stocks were in great demand, especially auto, pharma, IT and metals stocks. On Friday, this lifted the Bombay Stock Exchange's benchmark 30-share Sensex past the magical 15,000-mark. The Sensex took 146 sessions to cover the 1,000 point distance from 14,000 till 15,000. This is the highest since the index took 371 trading sessions to move up from 6,000 to 7,000.The sensex experienced its second bigger ever fall on 2nd august 2007. The fall came in after the Fed Reserve cut its discount interest rate at an emergency

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meeting and JPMorgan Chase agreed to buy Bear Stearns for USD 2 a share. Sensex closed down 951.03 points or 6.03% at 14809.49, When FIIs were pumping money in stock market and were Net Buyers of Equity worth Crores; the Sensex was moving Up , Up and Up on weekly basis. Many thought that FIIs were playing blind in Indian stock market. But when FIIs have turned Net Sellers of Equity and have started booking profit backed by massive sell off of shares in global markets; Sensex has to go down. As expected; the Sensex plunged by 600 Points in early trading on 16th August and most of the shares were down by 4 to 5 per cent.But very soon the sensex surpassed the gloomy days and Stock markets on Wednesday, September 19th, 2007 gave thumbs up to the decision of the U.S. Fed Reserve to reduce the rates by 50 basis points, as the benchmark 30-share BSE Sensex moved up sharply by 653.63 points or 4.17 per cent at 16322.75. By staying well above the 16000-mark, it outperformed most Asian peers and it was the biggest single day gain. This trend shows that global cues had an influential effect on our market.On the auspicious occasion of Ganesh chaturathi, India experienced a flow of good news. The festive spirit did not end with the immersion of Ganapati. On Wednesday, it boiled over to the streets of Mumbai and its financial district, the Sensex touched the magical 17,000 number. It took Dalal Street just 5 days to travel 1,000 points. Suddenly, tech stocks, which were the whipping boys till Tuesday, became hot favourites. Why? Hopes that the rupee will soften as a result of RBI's latest announcements to allow more outflow sparked a rally in tech stocks, pushing the Sensex to a new high of 17,073.87 during the day. At the end of the day, RBI's measures may not be enough to rein in the rupee. But there were no takers for this. The bellwether index finally settled at 16,921.39.On October 9th, 2007, Sensex hits a record high of 18,280 on the back of eye-popping rallies in Reliance & Reliance. At the height of the dotcom mania in 1999-00, the easiest way to maximize returns was to buy into any stock with the suffix ‘Software’ or ‘Technologies’. Eight years on, the same seems to hold true for any stock with the prefix ‘Reliance’, given their baffling run-up over the past one month. Eye-popping rallies in Reliance Industries, Reliance Energy and Reliance Communications lifted the 30-share Sensex to a record high of 18,327.42 intra-days.

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On October 15th 2007, amidst heavy buying by investors, the bull roared to breach the 19000 mark in just 4 sessions Sensex was up by 639.63 points or 3.47 per cent at 19058.67. This rise came on the back of some strong sectors for which the macro picture is quite bright — power, capital goods, infrastructure and telecom.Foreign Institutional Investors were pumping in huge money in the equity market and this too was pushing up the index. Since September, they nearly pumped in more than Rs. 30,000 crore in the cash market. After the U.S. Federal Reserve cut interest rates by 50 basis points, a re-rating of the emerging markets had been seen wherein liquidity flows were quite robust. Then suddenly happened the second biggest crash the sensex ever experienced when the sensex crashed by 1743 points on 17th October 2007 within minutes of opening, prompting suspension of trade for hour fallout of regulator Sebi's move to curb Foreign Institutional Investors. In a knee-jerk reaction to the cap proposed by the market regulator for the Participatory Notes, an overseas derivative instrument (ODI), used by foreign institutional investors (FIIs), the stock market crashed by 1743 points in intra-day, but recovered substantially later to close with a loss of 336.04 points or 1.76 per cent at 18715.82. But it was followed by a huge one-day gain as on October 23 when the BSE barometer rose 878.85 points after market regulator SEBI allowed sub-accounts of Foreign Institutional Investors (FIIS) to trade.

It took the index a little over 20 years to reach the first 10,000 mark, but just a little over 20 months to double that score and the sensex made history with touching the 20000 mark on October 29 2007. Significantly, it was the local institutions that were in the driver’s seat. As per BSE data, foreign funds have net sold over Rs 1,100 crore worth of shares over the last three trading sessions while local funds have net bought over Rs 2,300 crore worth of shares. Sceptics point to the fact that there were only a handful of stocks that was driving the market higher.On 13th November, BSE Sensex registered its biggest ever gain in a single of 893.58 points to settle at the third-highest level ever on buying by investors in bank counters and blue chip companies such as Reliance Industries. The market gain was because of global cues. Besides, the political development also gelled well with the sentiment. The rally was driven by short covering, strong buying by domestic investors. However, there was not much involvement of foreign investors.

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But in December 2007, sensex again experienced a black Monday on 17 th

December. The market succumbed to profit booking, that came in due to weak global cues as well as profit booking by FIIs in the holiday season. The Sensex ended losing 769 points from the previous close, at 19,261.

Sensex during year 2008:

After scaling new heights of 20000+, sensex entered year 2008 with rosy pictures. The trade pundits, brokers and even investors predicted new heights for the year. And they felt their predictions coming true when sensex touched the 21000 mark on 8th January 2008. It’s interesting if one sees in terms of flows; the journey from 20,000 to 21,000 is dominated by domestic institutional investors; FIIs were negative sellers, they sold in the cash market to the tune of USD 45 billion. So if one has to take out some pointers from this journey from 20,000 to 21,000, it is the longest journey which we have seen in the last 5,000 marks, the midcaps and smallcaps have been outperformers and in terms of flows, it has been domestic institutional investors which have been really putting the money.But the rosy picture soon turned gloomy. The skyrocketing sensex suddenly started heading south and Sensex saw the biggest absolute fall in history, shedding 2062 points intra-day. It closed at 17,605.35, down 1408.35 points or 7.4 per cent. It fell to a low of 16,951.50.  The fall was triggered as a result of weakness in global markets, but the impact of the global rout was the biggest in India. The market tumbled on account of a broad based sell-off that emerged in global equity markets. Fears over the solvency of major Western banks rattled stocks in Asia and Europe. After the worst January in the last 20 years for Indian equities, February turned out to be a flat month with the BSE sensex down 0.4%. India finished the month as the second worst emerging market. The underperformance can partly be attributed to the fact that Indian markets outperformed global markets in the last two months of 2007and hence we were seeing the lagged impact of that outperformance. In the shorter term, developments in the US economy and US markets continued to dominate investor sentiments globally and we saw volatility move up sharply across most markets.The Bombay Stock Exchange (BSE) Sensex fell 4.44 percent on Monday, 31 st

march the last day of the financial quarter, to end the quarter of March down 22.9

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percent, its biggest quarterly fall since the June 1992 quarter, as reports of rising inflation and global economic slowdown dampened market sentiments. Financial stocks led the Sensex slide along with IT. According to market analysts, IT stocks fell on worries about the health of the US economy. Indian IT firms depend on the US clients for a major share of their revenues.

Reasons for the present slowdown

The first month of the financial year 08-09 proved to be a good one for investors with the month ending on a positive note. The BSE sensex showed a gain of 10.5% to close at 17287 points. A combination of firming global markets and technical factors like short covering were the main reasons for the up move in the markets. Though inflation touched a high of 7.57% against 6.68% in march 2008 as a result RBI hiked CRR by 50 bps to take the figure to 8%, still emergence of retail investors was also seen; a fact reinforced by the strong movement in the mid-cap and small- cap index that rose 16% and 18% respectively.So April was the last month to close positive. After then nobody saw a stable sensex even. Sometimes it surged by 600+ points, but very next day it plunged by some 800 odd points and this story is still continuing. Every prediction, every forecasting has failed. The sensex is dancing on the music of lifetime high inflation rates, historic crude prices, tightening RBI policies, weak industrial production data, political uncertainties and obviously the sentiments of domestic as well as FIIs. The only relief came in the form of weakening Indian rupees which enlightened the IT sector and most recently the UPA gaining vote of confidence. Presently it is revolving around the figures of 14000 and no one knows what next?The 30-share BSE Sensex fell 117.89 points or 0.67% at 17,373.01 on Tuesday, 6 May 2008. The key benchmark indices ended lower as investors resorted to profit booking due to lack of positive triggers in the market. On 30th May an imminent hike in domestic retail fuel prices due to soaring crude oil prices weighed on the market last week. Foreign institutional investors sold close to Rs 2204 crore in the first three trading sessions of the week which accentuated the downfall. However, expected Q4 gross domestic product figures provided some relief to the bourses on Friday. IT stocks gained on slipping rupee. BSE Sensex rose in two out of five trading sessions. In May, Indian inflation stood at 8.2%.

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The market declined sharply as a hike in fuel prices by about 10% announced by the Union government on Wednesday, 4 June 2008, triggered possibility of a surge in inflation to double digit level. The BSE Sensex declined 843.39 points or 5.14% to 15,572.18 in the week ended 6 June 2008. The S&P CNX Nifty fell 242.3 points or 4.97% to 4627.80 in the week.On 6 June 2008, local benchmark indices underperformed their global peers, hit by rumours that the Reserve Bank of India (RBI) may hike cash reserve ratio (CRR) or interest rate later in the day to tame runaway inflation. The 30-share BSE Sensex declined 197.54 points or 1.25% to settle at 15,572.18.On 9th June 2008, Bombay’s Sensex index closed 506.08 points down at 15,066.10, having earlier fallen 4.4% and slipped below 15,000 for the first time since March. Oil prices surged to record levels, fanning fears that they will keep climbing and hurt world growth. Central banks across the globe warned that interest rates may have to rise as they look to keep inflation under control, despite the fact that economic growth is slowing in key nations such as the US and UK. On the week ending 27th June 2008 Sensex declined 769.07 points or 5.28% to 13,802.22. The S&P CNX Nifty lost 210.90 points or 4.85% to 4136.65 in the week. Equities extended losses for the fifth straight day on 24 June 2008 with the barometer index BSE Sensex falling below the psychologically important 14,000 mark for the first time in 10 months since late August 2007. On 25 June 2008, equities staged a solid rebound after touching fresh calendar 2008 lows in early trade. The initial jolt was caused by the Reserve Bank of India's move to hike the key lending rate. A setback to stocks in Asia and US, sharp spurt in crude oil prices and political uncertainty due to Indo-US nuclear deal rattled bourses on 27 June 2008.On July 15th 2008, Indian shares fell 4.9 per cent to their lowest close in 15 months, joining a world equities rout as investor’s dumped financials on concerns about the fallout from worsening global credit turmoil. Although Indian banks have no direct exposure to the US subprime mortgage sector, the global financial sector turmoil impacts sentiment in the local market and raises worries of more withdrawals by foreign funds.An 800+ point surge was experienced in the market on the day following UPA gaining vote of confidence but the very next day market couldn’t maintain the momentum and since then it’s in a doldrums’ position.

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Presently, we can saw market plunging after the RBI announced further hikes in Repo rate as well as CRR both increased to 9%. Also, the serial blasts at Ahmadabad and Bangalore adding to the worries and enhancing the negative sentiments. And above all we can't see any positive trigger that can dilute the flow of negative news.

Conclusion:

After going through all the analysis regarding the stock market in last 2 years, we can say that stock market touched its peak at 21000 but then crashed badly. Now it is revolving around 14000-16000 figure. Though the sensex is a barometer and after seeing such fluctuations one could be afraid of investing. Still we can say that people can play safe by investing the blue-chips and undervalued shares. During year 2006, if we keep aside that brief period of loss that the market witnessed from may 10 2006 to June 14 2006, investors’ wealth seem to have grown double fold with the Sensex touching the 10000, 11000, 12000, 13000 and 14000 levels in the same calendar year. Investor wealth in terms of market capitalization has been growing in the range of 6.84-12.41%. And talking about year 2007, we can summarize the happenings of year 2007 as a year which redefined the resistance levels at sensex. Strong economic data, heavy inflow of funds from FIIs towards the close of previous calendar year and decent to highly encouraging surge in earnings of top notch companies all pointed to a rosy 2007. The rupee's rise against the US dollar the regulator's decision to restrict investments made through participatory notes, rising crude oil prices, the sub-prime mortgage woes in US, concerns over a slowing down US economy and The Left parties' opposition to the Indo-US nuclear pact, did halt the market's progress at times. But the inherent strength of the Indian economy, fairly buoyant results quarter after quarter, the various chops and subsidies announced by the government and sustained efforts made by the market regulator to keep investor confidence in the system alive kept the momentum going.Presently the hike and seek being played by crude prices, inflation and RBI is affecting our market to a great extent. And adding to the worries are global slowdown, political instability, serial bomb blasts, negative public sentiments etc. It is indeed surprising that though the epicenter of the sub-prime crisis is the US,

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the tremors are being felt in India. The loss of market cap in the US is only 14 per cent vis-À-vis 38 per cent in India.But even after analyzing the causes for downturn, we can say that India story has not ended; else $200 billion with institutional investors would have fled for safer waters. Exports being 14 per cent of GDP, India is less vulnerable to external shocks than many other Asian nations. Political uncertainties too have narrowed down. Savings in India have risen at a historic rate of 35 per cent on the growing GDP base; 17 per cent of this is in gold, commodities and real-estate while financial savings represent 18 per cent of GDP. Even this is skewed towards deposits both banking and non-banking, while the percentage of savings in shares and debentures is a mere 6.3 per cent. If this percentage goes to 25 per cent, it would amount to $40 billion of incremental money being diverted to capital markets. So even after such downturns, we can be hopeful for a positive market.

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