COMAPARATIVE STUDY OF INDIAN STOCK MARKET

WITH OTHER ASIAN MARKETS

By: Misbah Ul Islam 10-MBA-36

Company Profile

• Amrapali Aadya Trading & Investment Pvt. Ltd. offers dematerialization services as a participant in Central Depository Services Limited (CDSL), through its Depository operations.

• Member of both BSE & NSE• Incorporated as Aadya commodities Pvt. Ltd, the company

later merged with leading developers Amrapli group, thus forming Amrapali Aadya Trading & Investment Pvt. Ltd.

• Amrapali Aadya is using some of the best brains in trading and some of the best software and hardware systems to give its clients maximum profit.

• Two basic trading software used are ODIN and NOW• Services provided:

–  Internet Trading  – Electronic Contract Notes –  Risk Management and Surveillance –  Online Banking Gateway  – Online Back Office Integration –  Depository Services  – End To End Trade Solutions  – Exclusive Services for HNI and NRI Clients  – Mutual Fund, IPO’s and Insurance

• Research is carried out daily on the basis of the current market scenario

Trading Software Interface

STOCK MARKET

• The term “the stock market” is a concept for the mechanism that enables the trading of company stocks (collective shares) and other securities.

• The stocks are listed and traded on stock exchanges

• Stock exchanges are entities specialized in the business of bringing buyers and sellers of stocks and securities together.

• Total number of stock exchanges in India: 22– They are in: Ahmedabad, Bangalore, Calcutta, Chennai, Delhi etc.

Industry Overview• India's oldest and first stock exchange: Mumbai

(Bombay) Stock Exchange. Established in 1875. More than 6,000 stocks listed.

• National Stock Exchange (NSE) is located in Mumbai.• There is also an Over The Counter Exchange of India

(OTCEI) which allows listing of small and medium sized companies.

• The regulatory agency which oversees the functioning of stock markets is the Securities and Exchange Board of India (SEBI), which is also located in Bombay. SEBI's website location is at http://www.sebi.gov.in 

BSE NSEMain Index: BSE Sensex S & P CNX Nifty

Full Name: Bombay Stock Exchange Limited

National Stock Exchange of India Limited

Key Person: Mr. Madhu Kannan (MD & CEO)

Mr. Ravi Narain (Managing Director)

Claim to fame: Oldest stock exchange in Asia.

Largest stock exchange in India in terms of daily

turnover and number of trades.

Established in: 1875 1992Market capitalization of

listed companies: Rs. 4,670,227 crore Rs. 3,367,350 crore.

Number of members: 951 1,026Number of listed companies

(June 2010): 6000+ 1,810

Geographical spread: Presence in 417 cities Presence in 1,486 citiesWebsite: www.bseindia.com www.nseindia.com

Index value (8th August ‘11): 16,990 5,118

IMPORTANCE OF STOCK MARKET

• 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.

• Exchanges also act as the clearinghouse for each transaction

IMPACT OF STOCK EXCHANGES IN INDIA

• Mobilization of savings • Increase in rate of return on investment • Availability of funds for growth of industries• Diversification of industries • Increase in employment • Increase in standard of living • Increase in GDP

CONCEPT OF A DEPOSITORY SYSTEM

• Depository system essentially aims at eliminating voluminous and cumbersome paper work involved in the script-based system.

• Depository system enables conversion of physical securities in the electronic form through a process of “dematerialization” (also known as “demat”)

DEPOSITORY

• A depository is an organization where securities of shareholders are held in electronic format.

• A depository is like a bank wherein the deposits are securities.

• Besides holding securities, a depository also provides services related to transactions in securities.

• This facilitates faster, risk free and low cost settlement.

DEPOSITORIES IN INDIA • NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL)

– an organization promoted by lOBI, UTI and National Stock Exchange of India Ltd.

• NSDL offers the following benefits: (a) De-materialization,

(b) Re-materialization,

(c) Electronic settlement trades in stock exchanges connected to NSDL,

(d) Pledging/ hypothecation of dematerialized securities against bank loan,

(e) Electronic credit of securities

• CENTRAL DEPOSITORY SERVICES (INDIA) LTD. (CDSL) – Bombay Stock Exchange Limited (BSE) promoted CDSL jointly with

leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank etc.

– CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants.

DEPOSITORY PARTICIPANT

• Depository provides its services to investors through its agents called as depository participant (DPs).

• NSDL is electronically linked to each of these DPs via a satellite link through Very Small Aperture Terminals (VSATs).

• The investor interacts with the depository through a depository participant of NSDL. A DP can be a bank, financial institution, a custodian or a broker.

ACTIVITIES OF DEPOSITORY SERVICES OFFERED

• ACCOUNT OPENING

• DEMATERIALIZATION

• REMATERIALIZATION

• TRADING / SETTLEMENTS

• NOMINATION

• ACCOUNT TRANSFER

• FREEZING / DEFREEZING

• ACCOUNT CLOSING

• TRANSMISSION

• IPO

WORKING IN DEPOSITORY PARTICIPANT

• The main objectives are as follows: – To understand various activities in E-Broking firm.

(D.P)

– To get familiar with the working of online trading.

– To gain practical knowledge in share trading.

– To get an exposure of the industry.

TASK ASSIGNED • Market observation – Being aware of the current market issues like market news, market position, stock

watch, global market condition, past trends etc.

• Customer acquisition – Customers are acquired through tele-calling and references.

• Technical Issues – Thorough knowledge of the software used is required.

• Administrative tasks – Completion of account opening form – Collection of requires documents form existing clients – To transfer shares

• Customer follow-up – Trading for offline clients under the relationship manager’s guidance– To give markets updates to newly acquire as well as existing clients

LIMITATIONS • It was hard to acquire knowledge about this field in such

short span of time • Share market is very vast & fast sector, it was very

difficult to cope-up with the environment in such short span of time.

• This field requires very deep fundamental & technical knowledge.

• Acquiring new clients was a tough task to perform • High risk involved while trading on behalf of the clients

under the guidance of RM.

COMAPARATIVE STUDY OF INDIAN STOCK MARKET WITH OTHER

ASIAN MARKETS

ECONOMIC OVERVIEW

• Since July 1991, in the face of an unprecedented foreign exchange crisis, Indian economy started experiencing an IMF-World Bank dictated regime of liberalization. One aspect of this is financial and stock market liberalization.

• The major growth drivers for brokerage revenue and trading volume are – Adoption of technology - screen-based trading, electronic matching,

and paperless securities – Centralized operations, effective risk management, and control on

large interconnected operations– Increasing access to capital and the ability to provide margin

finance – Continuous fall in brokerage fees

CHALLENGING LANDSCAPE

• Industry rapidly consolidating

• Share of Top 10 brokers grown by 58.4% since 2003-04

• Customer demands changing from plain vanilla execution to advice & service

• Multiple relationships across asset classes consolidating into a single relationship

Research Design

• The study done is Empirical in nature. It provides basis for external validation.– Empirical study relies on experience or observation alone i.e. data

based research.

• Data Collection and Sample Size – The weekly closing prices of six major Asian countries were

taken:• BSE Sensex (Mumbai-India)• Hang Seng (Hong Kong-China)• JKSE (Jakarta- Indonesia)• KLSE ( Kuala Lumpur- Malaysia)• Nikkie(Japan)• KS11(Seoul-Korea)

Qualitative Analysis

• In this section the various stock exchanges have been compared on the following parameters:

– Market Capitalization – Number of listed securities – Listing agreements – Circuit filters– Settlement

• Market Capitalization : – Market capitalization is the measure of corporate size of a

country. – It shows the current stock price multiplied by the number

of outstanding shares. – It is commonly referred to as Market cap. – It is calculated by multiplying the number of common

shares with the current price of those shares.

• Listed Securities:– Listing in a stock exchange refers to the admission of the

securities of the company for trade dealings in a recognized stock exchange.

• Listing Agreements :– These are the norms laid down by the securities exchange

boards of different markets for listing the companies. – Basic criteria are-

• Capitalisation• Number of share holders• Age of company• Number of shareholder applications in the IPO

• Circuit filters :– Stock markets have a reputation of crashing without any warning, thus

resulting in a loss of huge sums of money of the investors.

– A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a market

– Circuit breakers are a counter measure to the instability of the stock market.

– Circuit breaker is “a point at which a stock market will stop trading for a period of time in response to substantial drops in value.”

– Different circuit breakers are assigned in different markets

• Trading and Settlement Cycle – This segment takes care of the efficiency issue of the said

stock exchange.– It basically looks into the speed at which any of the

numerous transactions affected in the market gets settled.

Data Analysis and Findings

• Since stock prices are time series data, a check needs to be done to find the stationarity of the given time series

• A time series is said to be stationary if its mean value and its variance do not vary systematically over time.

Correlation of BSE Sensex with other Asian economies

Hang Seng JKSE KLSE Nikkie KS11

5 yr Correlation between BSE & other markets

(2005-2009)

-0.146 0.112 0.171 0.171 0.589

1yr Correlation between BSE & other markets

(2009)

-0.051 -0.004 0.122 0.074 0.533

6 months Correlation

between BSE & other markets

(July - Dec 2009)

-0.299 -0.180 -0.145 -0.022 0.387

Compounded Annual Growth rate of Stock market returns

BSE(India)

Hang Seng(Hong Kong)

JKSE(Indonesia)

KLSE(Malyasia)

Nikkie(Japan)

KS11(Korea)

5 yr(2005 -2009) 14.228 0.347 -0.272 0.554 -8.512 7.004

1 yr(2009) 79.504 65.696 -3.466 -0.051 29.821 45.766

6months

(Jul-Dec 2009)

34.029 29.458 30.039 28.076 0.449 17.699

Skewness of Stock Market returns

BSE(India)

Hang Seng(Hong Kong)

JKSE(Indonesia)

KLSE(Malyasia)

Nikkie(Japan)

KS11(Korea)

5 yr(2005 -2009) -0.351 -0.193 -1.013 -0.842 -1.412 -0.592

1 yr(2009) 0.117 0.119 0.511 -0.168 0.208 -0.808

6months

(Jul-Dec 2009)

-0.458 -0.008 -0.025 0.731 0.637 -0.276

Descriptive statistics of Weekly stock market returns in the long run

(2005-09)

BSE Sensex Hang Seng JKSE KLSE Nikkie KS11

Mean 0.453 0.231 0.439 0.153 0.028 0.307

Median 0.929 0.491 0.951 0.298 0.246 0.643

Standard

Deviation

3.993 3.636 3.875 2.140 3.423 3.592

Sample

Variance

15.941 13.223 15.017 4.578 11.720 12.906

Kurtosis 1.762 2.622 4.684 2.860 10.262 6.762

Skewness -0.351 -0.193 -1.013 -0.842 -1.412 -0.592

Range 30.032 28.752 33.650 16.135 36.465 39.058

Minimum -15.954 -16.319 -21.365 -9.255 -24.334 -20.490

Maximum 14.078 12.433 12.285 6.879 12.131 18.568

Conclusion • Correlation of stock returns of India with five other Asian

countries is found out with the following results:

– There exists a very weak correlation between the Indian markets and Hong Kong, Indonesia, Malaysia and Japan.

– Comparatively higher correlation was found between the Indian and the Korean markets

– Indian markets offer diversification benefits to international investors looking for investment in the Asia Pacific region.

– Indian markets also delivered the highest compounded annual

growth rate in stock market returns, both in the short as well as long run

Thank You