Microeconomic Study of Indian Stock Market

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A Microeconomic Study of the Indian Stock Market

A brief overview of the Indian stock market3

Purpose of the stock exchange3

PRIMARY MARKET3

SECONDARY MARKET4

Role of ‘Supply and demand’ on the stock price movement4

EVOLUTION OF MARKET STRUCTURE AND THE SELF REGULATORY APPROACH5

Traditional structure of the stock exchanges:5

Changes in the market structure and demutualization:5

Stock Markets as Perfectly Competitive markets:6

Transaction Costs in the present day stock markets:6

Current transaction costs:7

Importance of Risk in Stock market:7

Utility Analysis9

Stock Market Risks at different levels:11

Simplistic methods to Mitigate Risk:11

Types of Different Risks in Stock Market:11

A brief overview of the Indian stock market

The origin of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. However, for all practical purposes, the real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities.

An important early event in the development of the stock market in India was the formation of the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in Ahmadabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times subsequently. Bombay Stock Exchange (BSE) was the major exchange in India till 1994.National Stock Exchange (NSE) started operations in 1994. NSE was primarily setup after the Harshad Mehta scam which surfaced in 1992.

Purpose of the stock exchange

The purpose of the stock exchange is to regulate or control the business of buying, selling or dealing in securities. These securities include:

• Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.

• Government securities, and

• Rights or interest in securities

In general, the financial market divided into two parts, Money market and capital market. Securities market is an important, organized capital market where transaction of capital is facilitated by means of direct financing using securities as a commodity. Securities market can be divided into a primary market and secondary market.

PRIMARY MARKET

The primary market is an intermittent and discrete market where the initially listed shares are traded first time, changing hands from the listed company to the investors. It refers to the process through which the companies, the issuers of stocks, acquire capital by offering their stocks to investors who supply the capital. In other words primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

SECONDARY MARKET

The secondary market is an on-going market, which is equipped and organized with a place, facilities and other resources required for trading securities after their initial offering. It refers to a specific place where securities transaction among many and unspecified persons is carried out through intermediation of the securities...
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