Introduction

The capital market is the market for securities, where Companies and governments can raise long-term funds.
It is a market in which money is lent for periods longer than a year. A nation's capital market includes such
financial institutions as banks, insurance companies, and stock exchanges that channel long-term investment
funds to commercial and industrial borrowers. Unlike the money market, on which lending is ordinarily short
term, the capital market typically finances fixed investments like those in buildings and machinery.

The capital market consists of number of individuals and institutions (including the government) that canalize
the supply and demand for long term capital and claims on capital. The stock exchange, commercial banks, co-
operative banks, saving banks, development banks, insurance companies, investment trust or companies, etc.,
are important constituents of the capital markets.

The capital market, like the money market, has three important Components, namely the suppliers of loanable
funds, the borrowers and the Intermediaries who deal with the leaders on the one hand and the Borrowers on
the other.

The demand for capital comes mostly from agriculture, industry, trade The government. The predominant
form of industrial organization developed Capital Market becomes a necessary infrastructure for fast
industrialization. Capital market not concerned solely with the issue of new claims on capital, But also with
dealing in existing claims.

Definition of capital market:-

Capital markets are financial markets for the buying and selling of long-term debt or equity-backed securities.
These markets channel the wealth of savers to those who can put it to long-term productive use, such as
companies or governments making long-term investments.

Major Objectives of Indian Capital Market:-

 To mobilize resources for investments.

 To facilitate buying and selling of securities.
 To facilitate the process of efficient price discovery.
 To facilitate settlement of transactions in accordance with the predetermined time schedules.
Reforms in Capital Market of India:-

The major reform undertaken in capital market of India includes

 Establishment of SEBI:
The Securities and Exchange Board of India (SEBI) was established in 1988. It got a legal status in
1992. SEBI was primarily set up to regulate the activities of the merchant banks, to control the
operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a
regulatory authority of new issue activities of companies.
 Establishment of Creditors Rating Agencies:
Three creditors rating agencies viz. The Credit Rating Information Services of India Limited
(CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA -
1991) and Credit Analysis and Research Limited (CARE) were set up in order to assess the
financial health of different financial institutions and agencies related to the stock market activities.
It is a guide for the investors also in evaluating the risk of their investments.
 Increasing of Merchant Banking Activities:
Many Indian and foreign commercial banks have set up their merchant banking divisions in the last
few years. These divisions provide financial services such as underwriting facilities, issue
organizing, consultancy services, etc.
 Rising Electronic Transactions:
Due to technological development in the last few years, the physical transaction with more paper
work is reduced. It saves money, time and energy of investors. Thus it has made investing safer and
hassle free encouraging more people to join the capital market.
 Growing Mutual Fund Industry:
The growing of mutual funds in India has certainly helped the capital market to grow. Public sector
banks, foreign banks, financial institutions and joint mutual fund between the Indian and foreign
firms have launched many new funds. A big diversification in terms of schemes, maturity, etc. has
taken place in mutual funds in India. It has given a wide choice for the common investors to enter
the capital market.
 Growing Stock Exchanges:
The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the main
exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have spread
across the country. Recently a new Inter-connected Stock Exchange of India has joined the existing
stock exchanges.
  Investor's Protection:
Under the purview of the SEBI the Central Government of India has set up the Investors Education
and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect
the interest of the small investors from frauds and malpractices in the capital market.
 Growth of Derivative Transactions:
Since June 2000, the NSE has introduced the derivatives trading in the equities. In November 2001
it also introduced the future and options transactions. These innovative products have given variety
for the investment leading to the expansion of the capital market.
 Commodity Trading:
Along with the trading of ordinary securities, the trading in commodities is also recently
encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such transactions is
growing at a splendid rate.

These reforms have resulted into the tremendous growth of Indian capital market.

Factors Affecting Capital Market in India:-

A range of factors affects the capital market. Some of the factors that influence capital market are as follows:

 Performance of domestic Companies: The performance of the companies’ or rather corporate

earnings is one of the factors that have direct impact or effect on capital market in a country. Weak
corporate earnings indicate that the demand for goods and services in the economy is less due to
slow growth in per capita income of people. Because of slow growth in demand there is slow
growth in employment that means slow growth in demand in the near future. Thus weak corporate
earnings indicate average or not so good prospects for the economy as a whole in the near term. In
such a scenario the investors (both domestic as well as foreign) would be wary to invest in the
capital market and thus there is bear market like situation. The opposite case of it would be robust
corporate earnings and its positive impact on the capital market.
 Environmental Factors: Environmental Factor in India’s context primarily means- Monsoon. In
India around 60 % of agricultural production is dependent on monsoon. Thus there is heavy
dependence on monsoon. The major chunk of agricultural production comes from the states of
Punjab, Haryana & Uttar Pradesh. Thus deficient or delayed monsoon in this part of the country
would directly affect the agricultural output in the country. Apart from monsoon other natural
calamities like Floods, tsunami, drought, earthquake, etc. also have an impact on the capital market
of a country.
 Macro Economic Numbers: The macroeconomic numbers also influence the capital market. It
includes Index of Industrial Production (IIP) which is released every month, annual Inflation
number indicated by Wholesale Price Index (WPI) which is released every week, Export – Import
numbers which are declared every month, Core Industries growth rate (It includes Six Core
infrastructure industries – Coal, Crude oil, refining, power, cement and finished steel) which comes
out every month, etc. This macro –economic indicators indicate the state of the economy and the
direction in which the economy is headed and therefore impacts the capital market in India.
 Global Cues: In this world of globalization various economies are interdependent and
interconnected. An event in one part of the world is bound to affect other parts of the world;
however the magnitude and intensity of impact would vary. Thus capital market in India is also
affected by developments in other parts of the world i.e. U.S., Europe, Japan, etc. Global cues
includes corporate earnings of MNC’s, consumer confidence index in developed countries, jobless
claims in developed countries, global growth outlook given by various agencies like IMF,
economic growth of major economies, price of crude –oil, credit rating of various economies given
by Moody’s, S & P, etc.
 Political stability and government policies: For any economy to achieve and sustain growth it has to
have political stability and pro- growth government policies. This is because when there is political
stability there is stability and consistency in government’s attitude that is communicated through
various government policies. The vice- versa is the case when there is no political stability .So
capital market also reacts to the nature of government, attitude of government, and various policies
of the government.
 Growth prospectus of an economy: When the national income of the country increases and per
capita income of people increases it is said that the economy is growing. Higher income also means
higher expenditure and higher savings. This augurs well for the economy as higher expenditure
means higher demand and higher savings means higher investment. Thus when an economy is
growing at a good pace capital market of the country attracts more money from investors both from
within and outside the country and vice -versa. So we can say that growth prospects of an economy
do have an impact on capital markets.
 Investor Sentiment and risk appetite: Another factor, which influences capital market, is investor
sentiment and their risk appetite. Even if the investors have the money to invest but if they are not
confident about the returns from their investment, they may stay away from investment for some
time. At the same time if the investors have low risk appetite, which they were having in global and
Indian capital market some four to five months back due to global financial meltdown and
recessionary situation in U.S. & some parts of Europe, they may stay away from investment and
wait for the right time to come.
Types of Capital Market

Any government or corporation requires capital (funds) to finance its operations and to engage in its own long-
term investments. To do this, a company raises money through the sale of securities - stocks and bonds in the
company's name. These are bought and sold in the capital markets.

Thus there are two types of capital market as follows:

 Debt or Bond Market

 Stock or Equity Market

Debt or Bond Market:-

The bond market (also known as the debt, credit, or fixed income market) is a financial market where
participants buy and sell debt securities, usually in the form of bonds.

References to the "bond market" usually refer to the government bond market, because of its size, liquidity,
lack of credit risk and, therefore, sensitivity to interest rates Because of the inverse relationship between bond
valuation and interest rates, the bond market is often used to indicate changes in interest rates or the shape of
the yield curve. Besides other causes, the decentralized market structure of the corporate and municipal bond
markets, as distinguished from the stock market structure, results in higher transaction costs and less liquidity.

Bond markets in most countries remain decentralized and lack common exchanges like stock, future and
commodity markets. This has occurred, in part, because no two bond issues are exactly alike, and the variety
of bond securities outstanding greatly exceeds that of stocks.

With a large section of population underprivileged, the welfare commitments of the Indian state have to be
supported by a large government borrowing program. The outstanding marketable government debt has grown
from 4.3 trillion in 2000–01 to 29.9 trillion in 2012–13. The size of the annual borrowing of the central
government through dated securities has grown from 1.0 trillion to 5.6 trillion during this period. It is no mean
achievement to manage such large issuances in a non-disruptive manner in the post Fiscal Responsibility &
Budget Management (FRBM) regime and declining SLR. The liquidity in the secondary market has also
increased significantly from a daily average trading volume of 9 billion in February 2002 to 344 billion in
March, 2013. The development of the debt and the derivatives market in India needs to be seen from the
perspective of a central bank and a financial sector regulator which has a mandate to facilitate development of
debt markets of the country.
In many countries, debt market (both sovereign and corporate) is larger than equity markets. In fact, in
matured economies, the debt market is three times the size of the equity market. However, in India like in
emerging economies, the equity market has been more active, developed and has been the centre of attention
be it in media or otherwise. Nevertheless, the Indian debt market has transformed itself into a much more
vibrant trading field for debt instruments from the elementary market about a decade ago. Further, the
corporate debt market in developed economies like US is almost 20% of their total debt market. In contrast,
the corporate bond market (i.e. private corporate sector raising debt through public issuance in capital market),
is only an insignificant part of the Indian debt market. Amongst the most important reforms is the development
and deepening of the nonpublic debt capital market (DCM), where growth has been lack lustre in contrast to a
soaring equity market. The stock of listed non-public-sector debt in India is currently estimated at about USD
21 billion, or about 2% of GDP, just a fraction of the public-sector debt outstanding (around 35% of GDP), or
the equity market capitalisation (now close to 100% of GDP). To strengthen the Indian financial systems it is
now pertinent to develop the environment for corporate debt market in India.

The limitations of public finances as well as the systemic risk awareness of the banking systems in developing
countries have led to a growing interest in developing bond markets. It is believed that well run and liquid
corporate bond markets can play a critical role in supporting economic development in developing countries,
both at the macroeconomic and microeconomic levels. Though the corporate debt market in India has been in
existence since the Independence in 1947; it was only after 198586, following some debt market reforms that
the state owned public enterprises (PSUs) began issuing PSU bonds. However, in the absence of a well-
functioning secondary market, such debt instruments remained highly illiquid and unpopular among the
investing population at large.

Types of Bond Market in India:-

1. Corporate Bond Market

2. Municipal Bond Market
3. Government and Agency Bond Market
4. Funding Bond Market
5. Mortgage Backed and Collateral Debt Obligation Bond Market

Types of Debt Instruments:-

There are various types of debt instruments available that one can find in Indian debt market.

 Government Securities: It is the Reserve Bank of India that issues Government Securities or G-
Secs on behalf of the Government of India. These securities have a maturity period of 1 to 30
years. G-Secs offer fixed interest rate, where interests are payable semi-annually.
  Corporate Bonds: These bonds come from PSUs and private corporations and are offered for an
extensive range of tenures up to 15 years. Comparing to G-Secs, corporate bonds carry higher
risks, which depend upon the corporation, the industry where the corporation is currently
operating, the current market conditions, and the rating of the corporation. However, these
bonds also give higher returns than the G-Secs.
 Certificate of Deposit: These are negotiable money market instruments. Certificate of Deposits
(CDs), which usually offer higher returns than Bank term deposits, are issued in Demat form
and also as a Usance Promissory Notes. There are several institutions that can issue CDs. Banks
can offer CDs which have maturity between 7 days and 1 year. CDs from financial institutions
have maturity between 1 and 3 years. There are some agencies like ICRA, FITCH, CARE,
CRISIL etc. that offer ratings of CDs. CDs are available in the denominations of ` 1 Lac and in
multiple of that.
 Commercial Papers: There are short term securities with maturity of 7 to 365 days. CPs is
issued by corporate entities at a discount to face value.
 Zero Coupon bonds (ZCBs): ZCBs are available at a discount to their face value. There is no
interest paid on these instruments but on maturity the face value is redeemed from the RBI. A
bond of face value 100 will be available at a discount say at Rs 80 and the date of maturity is
after two years. This implies an interest rate on the instrument. When the bonds are redeemed
Rs 100 will be paid. The securities do not carry any coupon or interest rate i.e. unlike dated
securities no interest is paid out every year. When the bond matures the face value is returned.
The difference between the issue price (discounted price) and face value is the return on this
security.

Advantages of debt market:-

The biggest advantage of investing in Indian debt market is its assured returns. The returns that the market
offer is almost risk-free (though there is always certain amount of risks, however the trend says that return is
almost assured). Safer are the government securities. On the other hand, there are certain amounts of risks in
the corporate, FI and PSU debt instruments. However, investors can take help from the credit rating agencies
which rate those debt instruments.

Another advantage of investing in India debt market is its high liquidity. Banks offer easy loans to the
investors against government securities.

Disadvantages of debt market:-

As the returns here are risk free, those are not as high as the equities market at the same time. So, at one hand
we are getting assured returns, but on the other hand, we are getting less return at the same time. Retail
participation is also very less here, though increased recently.

Equity or Stock Market:-

A stock market or equity market is a public market (a loose network of economic transactions, not a physical
facility or discrete entity) 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
was estimated at about 36.6 trillion USD at the beginning of October 2012. 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 of 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 largest stock market in the United States, by market cap is the New York Stock
Exchange, NYSE, while in Canada, it is the Toronto Stock Exchange. Major European examples of stock
exchanges include the London Stock Exchange, Paris Bourse, and the Deutsche Börse. Asian examples
include the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the
Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa.

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 model 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.

Market participants:-

A few decades 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.
(They then went to 'negotiated' fees, but only for large institutions. However, corporate governance (at least in
the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.

Importance or Functions of Stock Exchange:-

We discuss about major functions of stock exchange under these headings:

 Providing a ready market:- The organization of stock exchange provides a ready market to speculators
and investors in industrial enterprises. It thus, enables the public to buy and sell securities already in
issue.
 Providing a quoting market prices:- It makes possible the determination of supply and demand on
price. The very sensitive pricing mechanism and the constant quoting of market price allows investors
to always be aware of values. This enables the production of various indexes which indicate trends etc.
 Providing facilities for working:- It provides opportunities to Jobbers and other members to perform
their activities with all their resources in the stock exchange.
 Safeguarding activities for investors:-The stock exchange renders safeguarding activities for investors
which enables them to make a fair judgment of a securities. Therefore directors have to disclose all
material facts to their respective shareholders. Thus innocent investors may be safeguard from the
clever brokers.
 Operating a compensation fund:- It also operate a compensation fund which is always available to
investors suffering loss due the speculating dealings in the stock exchange.
 Creating the discipline:- Its members controlled under rigid set of rules designed to protect the general
public and its members. Thus this tendency creates the discipline among its members in social life also.
 Checking functions:- New securities checked before being approved and admitted to listing. Thus stock
exchange exercises rigid control over the activities of its members.
 Adjustment of equilibrium:- The investors in the stock exchange promote the adjustment of
equilibrium of demand and supply of a particular stock and thus prevent the tendency of fluctuation in
the prices of shares.
 Maintenance of liquidity:- The bank and insurance companies purchase large number of securities from
the stock exchange. These securities are marketable and can be turned into cash at any time. Therefore
banks prefer to keep securities instead of cash in their reserve .This it facilities the banking system to
maintain liquidity by procuring the marketable securities.
 Promotion of the habit of saving:- Stock exchange provide a place for saving to general public. Thus it
creates the habit of thrift and investment among the public. This habit leads to investment of funds
incorporate or government securities. The funds placed at the disposal of companies are used by them
for productive purposes.
 Refining and advancing the industry:- Stock exchange advances the trade, commerce and industry in
the country. It provides opportunity to capital to flow into the most productive channels. Thus the flow
of capital from unproductive field to productive field helps to refine the large scale enterprises.
 Promotion of capital formation:- It plays an important part in capital formation in the country. Its
publicity regarding various industrial securities makes even disinterested people feel interested in
investment.
 Increasing Govt. Funds:-The govt. can undertake projects of national importance and social value by
raising funds through sale of its securities on stock exchange.
 Theoretical Background

Classification of Capital Market:-

Primary Market:-

Companies issue securities from time to time to raise funds in order to meet their financial requirements for
modernization, expansions and diversification programs. These securities are issued directly to the investors
(both individuals as well as institutional) through the mechanism called primary market or new issue market.
The primary market refers to the set-up, which helps the industry to raise the funds by issuing different types
of securities. This set-up consists of the type of securities available, institutions and framework. The primary
financial regulatory market discharges the important function of transfer of savings especially of the
individuals to the companies, the mutual funds, and the public sector undertakings. Individuals or other
investors with surplus money invest their savings in exchange for shares, debentures and other securities. In
the primary market the new issue of securities are presented in the form of public issues, right issues or private
placement. Firms that seek financing, exchange their financial liabilities, such as shares and debentures, in
return for the money provided by the financial intermediaries or the investors directly. These firms then
convert these funds into real capital such as plant and machinery etc. The structure of the capital market where
the firms exchange their financial liabilities for long-term financing is called the primary market. The primary
market has two distinguishing features:

 It is the segment of the capital market where capital formation occurs; and
 In order to obtain required financing, new issues of shares, debentures securities are sold in the primary
market. Subsequent trading in these securities occurs in other segment of the capital market, known as
secondary market. The securities that are often resorted for raising funds are equity shares, preference
shares, bonds, debentures, warrants, cumulative convertible preference shares, zero interest convertible
debentures, etc. Public issues of securities may be made through:
 Prospectus,
 Offer for sale,
 Book building process and
 Private placement
The investors directly subscribe the securities offered to public through a prospectus. The company through
different media generally makes wide publicity about the public offer.

Activities in the Primary Market:-

 Appointment of merchant bankers

 Collection of money
 Pricing of securities being issued
 Minimum subscription
 Communication/ Marketing of the issue
 Listing on the stock exchange(s)
 Information on credit risk
 Allotment of securities in demat/ physical mode
 Making public issues
 Record keeping

Function of Primary Market:-

 Organization: - Deals with the origin of the new issue. The proposal is analyzed in terms of the nature
of the security, the size of the issued timings of the issue and flotation method of the issue.
 Underwriting: - Underwriting is a kind of guarantee undertaken by an institution or firm of brokers
ensuring the marketability of an issue. it is a method whereby the guarantor makes a promise to the
stock issuing company that he would purchase a certain specific number of shares in the event of their
not being invested by the public.
 Distribution: - The third function is that of distribution of shares. Distribution means the function of
sale of shares and debentures to the investors. This is performed by brokers and agents. They maintain
regular lists of clients and directly contact them for purchase and sale of securities.

Role of Primary Market:-

 Capital formation - It provides attractive issue to the potential investors and with this company can
raise capital at lower costs.
 Liquidity - As the securities issued in primary market can be immediately sold in secondary market the
rate of liquidity is higher.
 Diversification - Many financial intermediaries invest in primary market; therefore there is less risk if
there is failure in investment as the company does not depend on a single investor. The diversification
of investment reduces the overall risk.
 Reduction in cost - Prospectus containing all details about the securities are given to the investors
hence reducing the cost is searching and assessing the individual securities.
Features of Primary Market:-

 It is the new issue market for the new long-term capital.

 Here company issues the securities directly to the investors and not through any intermediaries.
 On receiving the money from the new issues, the company will issue the security certificates to the
investors.
 The amount obtained by the company after the new issues are utilized for expansion of the present
business or for setting up new ventures.
 External finance for longer term such as loans from financial institutions is not included in primary
market. There is an option called ‘going public’ in which the borrowers in new issue market raise
capital for converting private capital into public capital.

Types of issues:-

Primary market Issues can be classified into four types.

 Initial Public Offer (IPO): When an unlisted company makes either a fresh issue of securities or an
offer for sale of its existing securities or both, for the first time to the public, the issue is called as an
Initial Public Offer.
 Follow On Public Offer (FPO): When an already listed company makes either a fresh issue of
securities to the public or an offer for sale of existing shares to the public, through an offer document, it
is referred to as Follow on Offer (FPO).
 Rights Issue: When a listed company proposes to issue fresh securities to its existing shareholders, as
on a record date, it is called as a rights issue. The rights are normally offered in a particular ratio to the
number of securities held prior to the issue. This route is best suited for companies who would like to
raise capital without diluting stake of its existing shareholders.
 A Preferential issue: A Preferential Issue is an issue of shares or of convertible securities by listed
companies to a select group of persons under Section 81 of the Companies Act, 1956, that is neither a
rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer
company has to comply with the Companies Act and the requirements contained in the chapter,
pertaining to preferential allotment in SEBI guidelines, which interalia include pricing, disclosures in
notice etc.

SECONDARY MARKET:-

Secondary market refers to the network/system for the subsequent sale and purchase of securities. An investor
can apply and get allotted a specified number of securities by the issuing company in the primary market.
However, once allotted the securities can thereafter be sold and purchased in the secondary market only. An
investor who wants to purchase the securities can buy these securities in the secondary market. The secondary
market is market for subsequent sale/purchase and trading in the securities. A security emerges or takes birth
in the primary market but its subsequent movements take place in secondary market. The secondary market
consists of that portion of the capital market where the previously issued securities are transacted. The firms do
not obtain any new financing from secondary market. The secondary market provides the life-blood to any
financial system in general, and to the capital market in particular.

The secondary market is represented by the stock exchanges in any capital market. The stock exchanges
provide an organized market place for the investors to trade in the securities. This may be the most important
function of stock exchanges. The stock exchange, theoretically speaking, is a perfectly competitive market, as
a large number of sellers and buyers participate in it and the information regarding the securities is publicly
available to all the investors. A stock exchange permits the security prices to be determined by the competitive
forces. They are not set by negotiations off the floor, where one party might have a bargaining advantage. The
bidding process flows from the demand and supply underlying each security. This means that the specific price
of a security is determined, more or less, in the manner of an auction. The stock exchanges provide market in
which the members of the stock exchanges (the share brokers) and the investors participate to ensure liquidity
to the latter.

In India, the secondary market, represented by the stock exchanges network, is more than 100 years old when
in 1875, the first stock exchange started operations in Mumbai. Gradually, stock exchanges at other places
have also been established and at present, there are 23 stock exchanges operating in India. The secondary
market in India got a boost when the Over the Counter Exchange of India (OTCEI) and the National Stock
Exchange (NSE) were established. Out of the 23 stock exchanges, 20 stock exchanges are operating at
Mumbai (BSE), Kolkata, Chennai, Ahmadabad, Delhi, and Indore. Bangalore, Hyderabad, Cochin, Kanpur,
Pune, Ludhiana, Guwahati, Mangalore, Patna, Jaipur, Bhubaneswar, Rajkot, Vadodara and Coimbatore.
Besides, there is one ICSE established by 14 Regional Stock Exchanges. It may be noted that out of 23 stock
exchanges, only 2, i.e., the NSE and the Over the Counter Exchange of India (OTCEI) have been established
by the All India Financial Institutions while other stock exchanges are operating as associations or limited
companies. In order to protect and safeguard the interest of the investors, the operations, functioning and
working of the stock exchanges and their members (i.e., share brokers) are supervised and regulated by the
Securities Contracts (Regulations) Act, 1956 and the SEBI Act, 1992.

Activities in the Secondary Market:-

 Trading of securities
 Risk management
 Clearing and settlement of trades
 Delivery of securities and funds
Importance of Secondary Market:-

 Providing liquidity and marketability to existing securities

 Pricing of securities
 Safety of transaction
 Contribution to economic growth
 Providing scope for speculation

Role of Secondary Market:-

For the general investor, the secondary market provides an efficient platform for trading of his securities. For
the management of the company, Secondary equity markets serve as a monitoring and control conduit—by
facilitating value-enhancing control activities, enabling implementation of incentive-based management
contracts, and aggregating information (via price discovery) that guides management decisions.

Products in secondary markets:-

 Equity Shares
 Rights Issue/ Rights Shares
 Bonus Shares
 Preferred Stock/ Preference shares
 Cumulative Preference Shares
 Cumulative Convertible Preference Shares
 Participating Preference Share
 Bond
 Zero Coupon Bond
 Convertible Bond
 Debentures
 Commercial Paper
 Coupons
 Treasury Bills

The OTC Market:-

Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC) market. The term originally
meant a relatively unorganized system where trading did not occur at a physical place, as we described above,
but rather through dealer networks. The term was most likely derived from the off-Wall Street trading that
boomed during the great bull market of the 1920s, in which shares were sold "over-the-counter" in stock
shops. In other words, the stocks were not listed on a stock exchange - they were "unlisted".

Stock Market in India:-

The Indian Equity Market is more popularly known as the Indian Stock Market. The Indian equity market has
become the third biggest after China and Hong Kong in the Asian region. The Indian financial markets have
also grown considerably. The market capitalization of the equity market (National Stock Exchange) has grown
from approximately 6.5 trillion in2000–01 to approximately 60 trillion in 2009–10 and further to
approximately 61 trillion in 2011–12.The market was slow since early 2007 and continued till the first quarter
of 2009.

Importance of Equity Market in India:-

 Raising Capital For Businesses: The Stock Exchange provide companies with the facility to raise
capital for expansion through selling shares to the investing public.
 Facilitating Company Growth: A takeover bid or a merger agreement through the stock market is one
of the simplest and most common ways for a company to grow by acquisition or fusion.
 Creating Investment Opportunities For Small Investors: As opposed to other businesses that require
huge capital outlay, investing in shares is open to both the large and small stock investors because a
person buys the number of shares they can afford. Therefore the Stock Exchange provides the
opportunity for small investors to own shares of the same companies as large investors.
 Barometer of the Economy: At the stock exchange, share prices rise and fall depending, largely, on
market forces. Share prices tend to rise or remain stable when companies and the economy in general
show signs of stability and growth. An economic recession, depression, or financial crisis could
eventually lead to a stock market crash. Therefore the movement of share prices and in general of the
stock indexes can be an indicator of the general trend in the economy.
 Speculation: The stock exchanges are also fashionable places for speculation. In a financial context, the
terms "speculation" and "investment" are actually quite specific. For instance, although the word
"investment" is typically used, in a general sense, to mean any act of placing money in a financial
vehicle with the intent of producing returns over a period of time, most ventured money—including
funds placed in the world's stock markets—is actually not investment but speculation.

History of Stock Market:-

Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange. In 12th century France the
courratiers de change were concerned with managing and regulating the debts of agricultural communities on
behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A
common misbelief is that in late 13th century Bruges commodity traders gathered inside the house of a man
called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until
then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those
gatherings occurred; the Van der Beurze had Antwerp, as most of the merchants of that period, as their
primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen"
soon opened in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the
Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in
Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This
was only possible because these were independent city states not ruled by a duke but a council of influential
citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and
get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first share on the
Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to
introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-
equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them" There
are now stock markets in virtually every developed and most developing economies, with the world's biggest
markets being in the United States, United Kingdom, Japan, India, China, Canada, Germany, France, South
Korea and the Netherlands.
Major Stock Exchanges of India:-

Bombay Stock Exchange (BSE):-

BSE is the oldest stock exchange in Asia. The extensiveness of the indigenous equity broking industry in India
led to the formation of the Native Share Brokers Association in 1875, which Bombay later Stock became
Exchange Limited (BSE). BSE is widely recognized due to its pivotal and preeminent role in the development
of the Indian capital market.

In 1995, the trading system transformed from open outcry system to an online screen-based order-driven
trading system.

The exchange opened up for foreign ownership (foreign institutional investment).

 Allowed Indian companies to raise capital from abroad through ADRs and GDRs.
 Expanded the product range (equities/derivatives/debt).
 Introduced the book building process and brought in transparency in IPO issuance.
 Depositories for share custody (dematerialization of shares).
 Internet trading (e-broking).
BSE has a nation-wide reach with a presence in more than 450 cities and towns of India. BSE has always been
at par with the international standards. It is the first exchange in India and the second in the world to obtain an
ISO 9001:2000 certifications. The equity market capitalization of the companies listed on the BSE was
US$1.63 trillion as of December 2011, making it the 4th largest stock exchange in Asia and the 8 th largest in
the world. The BSE has the largest number of listed companies in the world. As of December 2011, there are
over 5,085 listed Indian companies and over 8,196 scrip’s on the stock exchange, the Bombay Stock Exchange
has a significant trading volume. Though many other exchanges exist, BSE and the National Stock Exchange
of India account for the majority of the equity trading in India.

National Stock Exchange (NSE):-

With the liberalization of the Indian economy, it was found inevitable to lift the Indian stock market trading
system on par with the international standards. On the basis of the recommendations of high powered
Pherwani Committee, the National Stock Exchange was incorporated in 1992 by Industrial Development Bank
of India (IDBI), Industrial Credit and Investment Corporation of India(ICICI), Industrial Finance Corporation
of India (IFCI), all Insurance Corporations, selected commercial banks and others. Trading at NSE takes place
through a fully automated screen-based trading mechanism which adopts the principle of an order-driven
market. Trading members can stay at their offices and execute the trading, since they are linked through a
communication network. The prices at which the buyer and seller are willing to transact will appear on the
screen. When the prices match the transaction will be completed and a confirmation slip will be printed at the
office of the trading member. NSE has several advantages over the traditional trading exchanges.

They are as follows:

 NSE brings an integrated stock market trading network across the nation.
 Investors can trade at the same price from anywhere in the country since inter-market operations are
streamlined coupled with the countrywide access to the securities.
 Delays in communication, late payments and the malpractice’s prevailing in the traditional trading
mechanism can be done away with greater operational efficiency and informational transparency in the
stock market operations, with the support of total computerized network.
Mutual Fund In India:-

Mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. This
pool of money is invested in accordance with a stated objective. The joint ownership of the fund is thus
“Mutual”, i.e. the fund belongs to all investors. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through these investments and
the capital appreciations realized are shared by its unit holders in proportion the number of units owned by
them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to
invest in a diversified, professionally managed basket of securities at a relatively low cost. A Mutual Fund
is an investment tool that allows small investors access to a well-diversified portfolio of equities, bonds and
other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be
redeemed as needed. The fund’s Net Asset value (NAV) is determined each day.
Investments in securities are spread across a wide cross-section of industries and sectors and thus the risk is
reduced. Diversification reduces the risk because all stocks may not move in the same direction in the same
proportion at the same time. Mutual fund issues units to the investors in accordance with quantum of money
invested by them. Investors of mutual funds are known as unit holders.
When an investor subscribes for the units of a mutual fund, he becomes part owner of the assets of the fund in
the same proportion as his contribution amount put up with the corpus (the total amount of the fund). Mutual
Fund investor is also known as a mutual fund shareholder or a unit holder.
Any change in the value of the investments made into capital market instruments (such as shares, debentures etc)
is reflected in the Net Asset Value (NAV) of the scheme. NAV is defined as the market value of the Mutual
Fund scheme's assets net of its liabilities. NAV of a scheme is calculated by dividing the market value of
scheme's assets by the total number of units issued to the investors.

Definition of Mutual Fund:-

An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of
investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are
operated by money managers, who invest the fund's capital and attempt to produce capital gains and income
for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment
objectives stated in its prospectus. One of the main advantages of mutual funds is that they give small
investors access to professionally managed, diversified portfolios of equities, bonds and other securities, which
would be quite difficult (if not impossible) to create with a small amount of capital. Each shareholder
participates proportionally in the gain or loss of the fund. Mutual fund units, or shares, are issued and can
typically be purchased or redeemed as needed at the fund's current net asset value (NAV) per share.
Advantages of Mutual Fund:-
 Portfolio Diversification
 Professional management
 Reduction / Diversification of Risk
 Liquidity
 Flexibility & Convenience
 Reduction in Transaction cost
 Safety of regulated environment
 Choice of schemes
 Transparency

Disadvantage of Mutual Fund:-

 No control over Cost in the Hands of an Investor
 No tailor-made Portfolios
 Managing a Portfolio Funds
 Difficulty in selecting a Suitable Fund Scheme

History of Mutual Fund:-

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of
the Government of India and Reserve Bank. Though the growth was slow, but it accelerated from the year
1987 when non-UTI players entered the Industry.

In the past decade, Indian mutual fund industry had seen a dramatic improvement, both qualities wise as well
as quantity wise. Before, the monopoly of the market had seen an ending phase; the Assets Under
Management (AUM) was Rs67 billion. The private sector entry to the fund family raised the Aum to Rs. 470
billion in March 1993 and till April 2004; it reached the height if Rs. 1540 billion. The Mutual Fund Industry
is obviously growing at a tremendous space with the mutual fund industry can be broadly put into four phases
according to the development of the sector. Each phase is briefly described as under.
First Phase – 1964-87
Unit Trust of India (UTI) was established on 1963 by an Act of Parliament by the Reserve Bank of India and
functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-
linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and
administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end
of 1988 UTI had Rs.6,700 crores of assets under management.
Second Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life
Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund
was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87),
Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90),
Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its
mutual fund in December 1990.At the end of 1993, the mutual fund industry had assets under management of
Rs.47,004 crores.
Third Phase – 1993-2003 (Entry of Private Sector Funds)
1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds,
except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin
Templeton) was the first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual
Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. As at
the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
Fourth Phase – since February 2003
In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two
separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of
Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured
return and certain other schemes.
The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and
functions under the Mutual Fund Regulations. consolidation and growth. As at the end of September, 2004,
there were 29 funds, which manage assets of Rs.153108 crores under 421 schemes.
Mutual funds can be classified as follow :
 Based on their structure:
 Open-ended funds: Investors can buy and sell the units from the fund, at any point of time.
 Close-ended funds: These funds raise money from investors only once. Therefore, after the offer
period, fresh investments can not be made into the fund. If the fund is listed on a stocks exchange the
units can be traded like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New Fund
Offers of close-ended funds provided liquidity window on a periodic basis such as monthly or weekly.
Redemption of units can be made during specified intervals. Therefore, such funds have relatively low
liquidity.
 Based on their investment objective:
 Equity funds: These funds invest in equities and equity related instruments. With fluctuating share
prices, such funds show volatile performance, even losses. However, short term fluctuations in the
market, generally smoothens out in the long term, thereby offering higher returns at relatively lower
volatility. At the same time, such funds can yield great capital appreciation as, historically, equities
have outperformed all asset classes in the long term. Hence, investment in equity funds should be
considered for a period of at least 3-5 years. It can be further classified as:
1. Index funds- In this case a key stock market index, like BSE Sensex or Nifty is tracked. Their
portfolio mirrors the benchmark index both in terms of composition and individual stock
weightages.
2. Equity diversified funds- 100% of the capital is invested in equities spreading across different
sectors and stocks.
3. Dividend yield funds- it is similar to the equity diversified funds except that they invest in
companies offering high dividend yields.
4. Thematic funds- Invest 100% of the assets in sectors which are related through some theme.
e.g. -An infrastructure fund invests in power, construction, cements sectors etc.
5. Sector funds- Invest 100% of the capital in a specific sector. e.g. - A banking sector fund will
invest in banking stocks.
6. ELSS- Equity Linked Saving Scheme provides tax benefit to the investors.

 Balanced fund: Their investment portfolio includes both debt and equity. As a result, on the risk-
return ladder, they fall between equity and debt funds. Balanced funds are the ideal mutual funds
vehicle for investors who prefer spreading their risk across various instruments. Following are balanced
funds classes:
1. Debt-oriented funds -Investment below 65% in equities.
2. Equity-oriented funds -Invest at least 65% in equities, remaining in debt.
 Debt fund: They invest only in debt instruments, and are a good option for investors averse to idea of
taking risk associated with equities. Therefore, they invest exclusively in fixed-income instruments like
bonds, debentures, Government of India securities; and money market instruments such as certificates
of deposit (CD), commercial paper (CP) and call money. Put your money into any of these debt funds
depending on your investment horizon and needs.
1. Liquid funds- These funds invest 100% in money market instruments, a large portion being
invested in call money market.
2. Gilt funds ST- They invest 100% of their portfolio in government securities of and T-bills.
3. Floating rate funds - Invest in short-term debt papers. Floaters invest in debt instruments
which have variable coupon rate.
4. Arbitrage fund- They generate income through arbitrage opportunities due to mis-pricing
between cash market and derivatives market. Funds are allocated to equities, derivatives and
money markets. Higher proportion (around 75%) is put in money markets, in the absence of
arbitrage opportunities.
5. Gilt funds LT- They invest 100% of their portfolio in long-term government securities.
6. Income funds LT- Typically, such funds invest a major portion of the portfolio in long-term
debt papers.
7. MIPs- Monthly Income Plans have an exposure of 70%-90% to debt and an exposure of 10%-
30% to equities.
8. FMPs- fixed monthly plans invest in debt papers whose maturity is in line with that of the fund.
 Research Design
Review of literature

Subir Gokarn (1996) in his research

paper “Indian Capital Market Reforms,
1992-96 An Assessment”
has used a conceptual framework that
draws on the theory of regulation on the
one hand and the new
political economy on the other to
make an assessment of the wide-
ranging reforms that have been
initiated in the Indian stock market
over the past four years. Based on
the framework the various
reforms are classified into categories
reflecting their regulatory
effectiveness and/or their impact on
sources of market failure. The
researcher arrives at a generally
positive assessment of the reforms, but
points out three areas of concern:
the lack of a fixed term appointment
for the regulators; the
persistence of non-competitive
conditions in the market; and the
excessive entry of new scripts into the
market, Although in recent days, some
steps have been taken to address this
problem as well.
Subir Gokarn (1996) in his research
paper “Indian Capital Market Reforms,
1992-96 An Assessment”
has used a conceptual framework that
draws on the theory of regulation on the
one hand and the new
political economy on the other to
make an assessment of the wide-
ranging reforms that have been
initiated in the Indian stock market
over the past four years. Based on
the framework the various
reforms are classified into categories
reflecting their regulatory
effectiveness and/or their impact on
sources of market failure. The
researcher arrives at a generally
positive assessment of the reforms, but
points out three areas of concern:
the lack of a fixed term appointment
for the regulators; the
persistence of non-competitive
conditions in the market; and the
excessive entry of new scripts into the
market, Although in recent days, some
steps have been taken to address this
problem as well.
Subir Gokarn (1996) in his research
paper “Indian Capital Market Reforms,
1992-96 An Assessment”
has used a conceptual framework that
draws on the theory of regulation on the
one hand and the new
political economy on the other to
make an assessment of the wide-
ranging reforms that have been
initiated in the Indian stock market
over the past four years. Based on
the framework the various
reforms are classified into categories
reflecting their regulatory
effectiveness and/or their impact on
sources of market failure. The
researcher arrives at a generally
positive assessment of the reforms, but
points out three areas of concern:
the lack of a fixed term appointment
for the regulators; the
persistence of non-competitive
conditions in the market; and the
excessive entry of new scripts into the
market, Although in recent days, some
steps have been taken to address this
problem as well.
Subir Gokarn (1996) in his research
paper “Indian Capital Market Reforms,
1992-96 An Assessment”
has used a conceptual framework that
draws on the theory of regulation on the
one hand and the new
political economy on the other to
make an assessment of the wide-
ranging reforms that have been
initiated in the Indian stock market
over the past four years. Based on
the framework the various
reforms are classified into categories
reflecting their regulatory
effectiveness and/or their impact on
sources of market failure. The
researcher arrives at a generally
positive assessment of the reforms, but
points out three areas of concern:
the lack of a fixed term appointment
for the regulators; the
persistence of non-competitive
conditions in the market; and the
excessive entry of new scripts into the
market, Although in recent days, some
steps have been taken to address this
problem as well.
Subir Gokarn (1996) in his research
paper “Indian Capital Market Reforms,
1992-96 An Assessment”
has used a conceptual framework that
draws on the theory of regulation on the
one hand and the new
political economy on the other to
make an assessment of the wide-
ranging reforms that have been
initiated in the Indian stock market
over the past four years. Based on
the framework the various
reforms are classified into categories
reflecting their regulatory
effectiveness and/or their impact on
sources of market failure. The
researcher arrives at a generally
positive assessment of the reforms, but
points out three areas of concern:
the lack of a fixed term appointment
for the regulators; the
persistence of non-competitive
conditions in the market; and the
excessive entry of new scripts into the
market, Although in recent days, some
steps have been taken to address this
problem as well.
Subir Gokarn (1996) in his research paper “Indian Capital Market Reforms, 1992-96 An Assessment” has
used a conceptual framework that draws on the theory of regulation on the one hand and the new political
economy on the other to make an assessment of the wide-ranging reforms that have been initiated in the Indian
stock market over the past four years. Based on the framework the various reforms are classified into
categories reflecting their regulatory effectiveness and/or their impact on sources of market failure. The
researcher arrives at a generally positive assessment of the reforms, but points out three areas of concern: the
lack of a fixed term appointment for the regulators; the persistence of non-competitive conditions in the
market; and the excessive entry of new scripts into the market, Although in recent days, some steps have been
taken to address this problem as well.

Anand Pandey (2003) in his thesis entitled “Efficiency of Indian Stock Market” made an analysis of three
popular stock indices to test the efficiency level and random walk nature of Indian equity market. The study
presented the evidence for inefficient form of Indian market. Autocorrelation analysis and runs test concluded
that the series of stock indices in India are biased random time series.
Selvam M (2008) in his research paper “Efficiency of Indian Capital Market to react adequately to the
announcement of quarterly earnings: A study in Capital goods Industry” has stated that an efficient and
integrated capital market, is an important infrastructure that facilitates capital formation. The efficiency with
which the capital formation is carried out depends on the efficiency of the capital markets and financial
institutions. A capital market is said to be efficient with respect to an information item if the prices of
securities fully impound the returns implications of that item. The present study has empirically examined the
informational efficiency of Indian capital market with regard to quarterly earnings released by the automobile
sector companies in the semi-strong form of EMH. The study found that the Indian Capital market is near
efficient in the semi- strong form of EMH, which can be used by the investors to make abnormal returns.

Shyan-Rong Chou, Gow-Liang Huang and Hui-Lin Hsu (2010) expressed that faced with the series of
financial events leading to the current turmoil, unpleasant investor experience has become common and
personal experiences and reports of such are demonstrated in risk and attitudes to risk. The paper showed that
investors are able to choose an investment with potential risk and returns to suit their own preferences.
Products of lower potential profit are tolerated when the risk associated with those products is similarly low. In
their study they found that attitude to risk is very similar for both the genders. The study shows most stock
trading is transacted by individual rather than institutional investors, therefore the capital gains and losses from
stock price fluctuations are felt first-hand by individual investors.
Yu-Jane Liu, Ming-Chun Wang and Longkai Zhao (2010) found options are important investment financial
instruments as their flexibility makes financial market complete. Accordingly, options are complicated for
those who do not educate themselves on the subject. Study found a trader who is more professional,
sophisticated, and experienced is less susceptible to isolate his decision-making sets and simplify complicated
investment strategies to form his portfolios. The study revealed that traders in option markets don’t trade
call/put contracts to such a great degree. In general, most investors prefer to trade front-month or near-the-
money. Trading in a futures market for option traders, this suggests that almost half of the investors are trading
in both options and futures market.
Jumba Shelly (2010) in her report “A project on Capital Market” has ascertained that the performance of the
company’s or corporate earnings is one of the factors which have direct impact or effect on capital market in a
country. Weak corporate earnings indicate that the demand for goods and services in the economy is less due
to slow growth in per capita income of people. Because of slow growth in demand there is slow growth in
employment which means slow growth in demand in the near future. Thus weak corporate earnings indicate
average or not so good prospects for the economy as a whole in the near term. In such a scenario the investors
(both domestic as well as foreign) would vary to invest in the capital market and thus there is bear market like
situation. The opposite case of it would be robust corporate earnings and its positive impact on the capital
market. The researcher has also added that the macroeconomic numbers also influence the capital market. It
includes Index of Industrial Production (IIP) which is released every month, annual Inflation number indicated
by Wholesale Price Index (WPI) which is released every week, Export – Import numbers which are declared
every month, Core Industries growth rate (It includes Six Core infrastructure industries – Coal, Crude oil,
refining, power, cement and finished steel) which comes out every month etc. This macro –economic
indicators indicate the state of the economy and the direction in which the economy is headed and therefore
impacts the capital market in India.

S. Gupta, P. Chawla and S. Harkant (2011) stated financial markets are constantly becoming more efficient
providing more promising solutions to the investors. Study also proved that occupation of the investor is not
affected in investment decision. The most preferred investment avenue is insurance with least equity market.
The study also argued that return on investment and safety are the most preferred attributes for the investment
decision instead of liquidity.
Gopikrishna Suvanam & Amit Trivedi (2011) studied derivative trading is essential tool for the health of
markets as they enhance price discovery and supplement liquidity. In a span of a year and a half after that
index options, stock options and lastly stock futures were introduced, derivatives volumes have grown to
multiples of cash market volumes and have been a mode of speculation and hedging for market participants,
not possible otherwise through cash markets. The investor invests for a certain period, the issuer of the product
constantly uses derivatives segment to hedge his positions to create the desired payoff for its clients.
M. Sathish, K. J. Naveen and V. Jeevanantham (2011) studied in the options available to investors are
different and the factors motivating the investors to invest are governed by their socio-economic. They argued
that instead of investing directly, the investors particularly, small investors may go for indirect investment
because they may not be in a position to undertake fundamental and technical analysis before they decide
about their investment options. Their empirical study showed that majority of the investors of mutual funds is
also belongs to equities who give the first preference to that avenue which gives good return. From the study,
concluded that lack of knowledge as the primary reason for not investing in investment vehicle.
S. Saravanakumar, S. Gunasekaran and R. Aarthy (2011) showed the upswing in capital market allows the
investors to harvest handsome return in their investments, but day-trader in stock market hard to take
advantage in bullish and bearish market conditions by holding long or short positions. Now the derivative
instruments offer them to hedge against the adverse conditions in the stock market. They argued that
secondary market is the most preferred than primary market and cash market is the most preferred market than
derivatives market because of high risk when derivatives market is preferred than cash market for higher
return.
Ahuja Juhi (2012) in her research paper entitled “Indian Capital Market: An Overview with Its Growth” has
examined that there has been a paradigm shift in Indian capital market. The application of many reforms &
developments in Indian capital market has made the Indian capital market comparable with the international
capital markets. Now, the market features a developed regulatory mechanism and a modern market
infrastructure with growing market capitalization, market liquidity, and mobilization of resources. The
emergence of Private Corporate Debt market is also a good innovation replacing the banking mode of
corporate finance. However, the market has witnessed its worst time with the recent global financial crisis that
originated from the US sub-prime mortgage market and spread over to the entire world as a contagion. The
Capital Market in India delivered a sluggish performance.

Geetha et al (2012) in their research paper titled “Capital Market in India: A Sectorial Analysis” had made an
attempt to compare and contrast the risk return characteristics of ten major industrial sectors which account for
88.74% of the economy’s industrial production. A comparative analysis is done on the annual returns, total
risk, systematic risk, abnormal returns and correlation of each sectoral index. It was observed that the sectoral
indices exhibited significant difference in their risk return characteristics and they also followed business
cycles of recession, recovery and boom in their performance. Indian economy has emerged as one of the most
attractive destinations for business and investment opportunities due to huge manpower base, diversified
natural resources and strong macro-economic fundamentals. Indian economy in the world market is explained
in terms of statistical information provided by the various economic parameters. Such indicators include Gross
Domestic Product (GDP), Gross National Product (GNP), Per Capita Income, Whole sale Price Index (WPI),
Consumer Price Index (CPI), etc. The economic indicators as mentioned are recently enhanced with a new
indicator – the capital market index, which had for years proved to be a measure of the investor sentiment in
an economy. It had been one of the leading indicators of economic performance in many countries and India
also views it with substantial importance as an indicator of market sentiment. The stock market indexes thus
prove to be efficient tools to measure the performance of Indian capital market and hence present an overall
idea of the economy as a whole. In this paper an attempt has been made for making an analysis of the
performance of major industrial sectors operating in the stock market. While concluding it have been stated the
Indian Capital Market is highly diversified with numerous industrial sectors operating within it. The study
provides an overview of the risk return characteristics of ten major industrial sectors in the Indian market.
Investment decisions are generally made on the basis of performance of a stock and the expectations of the
investor – capital gain, regular income, liquidity etc.; in addition there are some other indicators that investors
would attach importance are return, risk and volatility.

Kumar Bharath & Sampath Sangu (2012) through their research paper entitled “Corporate Governance and
Capital Markets: A Theoretical Framework” has outline a conceptual framework of the relationship between
relationship between corporate governance and two important determinants of capital market development
namely, a firm’s access to finance, and its financial performance. The framework assumes that a firm’s
corporate governance is simultaneously determined by a group of related governance components and other
firm characteristics. In this study an attempt is made to know how organisations are fair in corporate
governance and capital market. It was explained that firm-level corporate governance quality can enhance both
the firm’s ability to gain access to finance and its financial performance, which eventually lead to capital
market development.

Sandhya.C et al (2012) in their research article titled “A study on Volatility Index Indian Capital Market: An
evaluation of NSE” has examined and stated that If a stock is more volatile, it is also more risky also known as
beta, risk, relative volatility, implied volatility. Volatility is a measure of dispersion around the mean or
average return of a security. It has been ascertained that NSE indices had more volatility in the year 2007 and
2009; market was showing bullish trend and the stock market reached the peak points. In the year 2008 market
showed the down ward moment due to the American mortgage crises it affected the other markets. In May
2006 due to foreign institutional investment caused for volatility in May, 2006. While investing in the stock
market the investor should take into consideration factors like the performance of the market, policy change
announcement, increasing and decreasing the interest rates, regulation of the government and encouragement
of the priority sectors. All these factors considerably affect the Capital Market and should be taken into
account in order to know about the economic condition of the nation.

Another remarkable contribution in this field is through the research paper of AnsariMohd Shamim(2012)
entitled “Indian Capital Market Review: Issues, Dimensions and Performance Analysis” in which the
researcher has ascertained that the purpose of an efficient capital market is to mobilize funds from those who
have it and route each them to those who can utilize it in the best possible way. The researcher has also
analyzed that India’s financial market is multi-facet but not balanced. Further it has been stated that the Indian
capital market in the recent year has undergone a lot of innovation in term regulation and mode of operation.
The researcher while concluding has stated that India needs innovative financial instrument in its domestic
capital market. Financial Innovation must aim value addition in existing technologies, risk management
practices, credit system, process, and products. As per the analysis of the researcher there is positive
correlation between finance and economic growth. Thus, economic development is relatively impossible
without quality innovation in financial market. The researcher has also added that the creation of a deep and
robust debt capital mechanism is the key to financing infrastructure companies by allowing them to raise long
term debt. At last the researcher has concluded with this fact that emerging economies like India have an
advantage of learning from the mistakes of others.

Another prominent part comes from Shaik Abdul Majeeb Pasha (2013) duringhis research paper “An
Evolutionary Critical approach on Indian Capital Market Developments”. In this paper the researcher has
examined various kinds of changes that have taken place in Indian Capital Market before and after
globalisation, liberalization and privatization (GLP) era and wants to evaluate critically capital market system
as well as Securities and Exchange Board of India (SEBI) role in India. In fact, it is observed that, on almost
all the operational and systematic risk management parameters, settlement system, disclosures, accounting
standards, the Indian Capital Market is at par with the global standards with little bit loopholes. While
concluding it has been briefly noticed that a perception is steadily growing about the Indian Capital Market, as
a dynamic market.