INDIAN EQUITY MARKETINDEX Acknowledgement Stock market Stock exchange Segments of security market Regulator Who can invest in India? Stock market trend What causes changes in stock market? Options available for investments Derivatives Factors driving the growth of Derivatives Types of derivatives: Comparative analysis.

ACKNOWLEDGEMENTI wish to express my sincere gratitude to all those who extended their help, guidance and suggestions without which it would not have been possible to complete the project report. I am deeply indebted to my guide Ms. Sucheta Pawar for his valuable and enlightened guidance and who encouraged me in compilation of my project,And last but not the least, www.google.com, without it, making the project would have been impossible.

STOCK MARKETStock market is a market where the trading of company stock, both listed securities and unlisted takes place.The stock market is a broad entity covering a wide range of market activities and companies whereas the stock exchanges are one part of the stock market system.

STOCK EXCHANGEA stock exchange is a company or organization that promotes the trading of stocks through listing services and requirements, tools to bring buyers and sellers together, and systems to track prices and sales data.

Stock exchanges in IndiaIndia has 21 recognised stock exchanges but the most active ones are the NSE and the BSE.The BSE and NSEMost of the trading in the Indian stock market takes place on its two stock exchanges: theBombay Stock Exchange(BSE) and theNational Stock Exchange(NSE).The BSE has been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading in 1994. However, both exchanges follow the same trading mechanism, trading hours, settlement process, etc. At the last count, the BSE had about 4,700 listed firms, whereas the rival NSE had about 1,200. Almost all the significant firms ofIndiaare listed on both the exchanges. NSE enjoys a dominant share inspot trading, with about 70% of the market share, as of 2009, and almost a complete monopoly in derivativestrading, with about a 98% share in this market, also as of 2009. Both exchanges compete for the order flow that leads to reduced costs, market efficiency and innovation. The presence of arbitrageurskeeps the prices on the two stock exchanges within a very tight range.

SEGMENTS OF SECURITIES MARKETThe securities market has two interdependent segments: the primary (new issues) market and the secondary market.The primary market provides the channel for sale of new securities whileThe secondary market deals in securities previously issued.

REGULATORWhy does Securities Market need Regulators?The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected.

Who regulates the Securities Market?The responsibility for regulating the securities market is shared byDepartment of Economic Affairs (DEA), Department of Company Affairs(DCA) , Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).

What is SEBI and what is its role?The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992.SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for(a) Protecting the interests of investors in securities(b) Promoting the development of the securities market and(c) Regulating the securities market.

Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market.SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for: Regulating the business in stock exchanges and any other securities markets Registering and regulating the working of stock brokers, subbrokers etc. Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self regulatory organizations, mutual funds and other persons associated with the securities market.

WHO CAN INVEST IN INDIA?Any citizen of India can invest in equity market, provided he has a pan card and a demat account & trading can be done online or over the phone through the help of an intermediary. NRI's can invest in the Indian stock market under PIS (Portfolio Investment Scheme) which is regulated by RBI but NRI's are not allowed day trading that is to buy and sell a stock on the same day.

Investments in Indian Securities by Qualified Foreign InvestorsThe government allowedqualified foreign investors (QFIs), including overseas individuals, to invest directly in Indian stock markets. So far,QFIswere permitted to invest only in mutual fund schemes.

QFIs shall include individuals, groups or associations that are: Resident in a country that is a member of the Financial Action Task Force (FATF) or a country that is a member of a group which is a member of FATF and Resident in a country that is a signatory to IOSCOs MMOU or a signatory of a bilateral MOU with Securities and Exchange Board of India (SEBI).

STOCK MARKET TRENDSudden rises or drops in stock prices are often called spikes. Spikes are extremely difficult, if not impossible, to predict. Stock market trends are like the behaviour of a person. After studying how a person reacts to different situations, we can make predictions about how that person will react to an event. Similarly, recognizing a trend in the stock market or in an individual stock will enable us to choose the best times to buy and sell.

Bull Markets and Bear MarketsA bull market is a rising market. In a bull market, investors are positive. The economy tends to be strong.Unemploymentis low. Consumers are spending money, which increases business profits. When businesses profit, investors demand to share a piece of the pie -- they buy stocks and hang on tight to watch the money growing. The supply of shares, then, is low -- no one wants to give up their share of the XYZ Co. The competition to acquire those much-coveted shares becomes fierce, which drives the prices up even higher. Investors take risks because they feel good about their chances of making the big bucks.

A bear market is a declining market. It tends to begin with a sharp drop in stock prices across the board. Very rarely stock prices increase. But the bear market keeps falling. In a bear market, the economy tends to be weak. Unemployment increases. Consumers spend less, which results in lower business profits; this devalues a given company's stock. Investors tend to sell their stocks before the value decreases too much. Investors don't want to take risks because they don't feel good about their chances.

WHAT CAUSES CHANGE IN THE STOCK MARKET?Many factors affect prices in the stock market, including inflation,interest rates, energy prices,oil pricesand international issues such as war, crime, fraud and political unrest.

Inflation:Inflation is a rise in prices across the board. Inflation is the reason a car costs Rs 1, 00,000 in 1990 and Rs 4, 00,000 in 2010. Over the long term, inflation is good, because it means consumers are spending a lot of money -- the economy is robust. When inflation is too high, though, consumers pull back and spend less. After all, Rs 20 is a lot of money to spend on a toffee. When consumers spend less, companies don't make as much money. When companies don't make money, investors lose confidence in those companies. Many investors sell their stock because they believe the stock is worth less and is only going to decrease in price. As the demand for the stock decreases, the price of the stock decreases. When this happens to many companies in the stock market, the stock market experiences a downward shift.

Interest Rates:To bring inflation under control, the Federal Reserve System canraise the federal funds interest rate, which is the interest rate banks pay on loans they take from the Federal Reserve. Think of the Federal Reserve as acredit cardfor banks. When banks have to pay a higher interest rate, they often raise their own interest rates on loans and credit card accounts for businesses and individuals. This means that businesses and consumers must pay higher interest on borrowed funds. This usually causes consumers to spend less and businesses to borrow less. When businesses don't borrow money to develop that new widget, they tend to grow at a slower rate. When consumers don't buy things and businesses don't grow, companies' profits decrease, causing a stock price decrease. Conversely, when the Federal Reserve cuts the interest rate, investors tend to get excited. The cut means banks will be borrowing and lending more and at better rates. Businesses will grow and consumers will spend. Company profits will go up. Investors tend to buy.

Earnings:When XYZ Co. reports profits, everyone wants a piece. Profit means the company is doing well. But maybe after a while, people grow tired of XYZ and want to buy the new ABC instead. XYZ Co. reports lower profits. As we saw with inflation and interest rates, when a company reports lower profits, investors lose confidence in the company and sell their stock, which decreases the value of the stock.

Energy Prices:People always need energy.Electricityand natural gas keep us warm, cook our food and keep our computers happy. Therefore, the demand for energy is pretty constant. Only major changes in energy costs have a significant effect on the stock market.

Oil Prices:People almost always need oil, in the form of gasoline. Whengas pricesare high, however, some people look to alternative methods of transportation -- carpools,public transportation,bikes, etc. Others keep paying the high price but, as a result, buy fewer consumer goods. The stock market tends to react negatively to high oil prices.

International and Domestic Issues:War tends to affect the stock market negatively. The same goes for crime, fraud, and domestic or political unrest. Consumers worry when CEOs steal money, terrorists kill innocent people, or politicians are involved in serious scandals. Who knows what will happen next? Consumers save their money. Businesses make less money. Investors tend to dump their stocks, causing a fall in the market.

Fear:Besides being afraid of the market consequences of war, oil prices or a federal interest rate hike, investors are afraid of losing their money. Investors tend to dislike seeing their money dwindle as the price of their shares decreases.All these factors cause changes in the market.

OPTIONS AVAILABLE FOR INVESTMENTOne may invest in:Commodities (physical assets) like real estate, gold/jewellery, commodities etc and/orFinancial assets such as fixed deposits with banks, small savingInstruments with post offices, insurance/provident/pension fund etc.In securities market one may invest in instruments like shares, bonds, mutual funds etc.

Equity/ShareTotal equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 12 said to have 20, 00,000 equity shares of Rs 10 each.The holders of such shares are members of the company and have voting rights.

Debt InstrumentIn the Indian securities markets, the term bond is used for debt instruments issued by the Central and State governments and public sector organizations and the term debenture is used for instruments issued by private corporate sector.Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender.

Mutual FundA Mutual Fund is a body corporate registered with SEBI (Securities ExchangeBoard of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc.Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. Mutual Funds invest in 13 various asset classes like equity, bonds, debentures, and commercial paper and government securities.The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund.DERIVATIVESDerivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying".FACTORS DRIVING THE GROWTH OF DERIVATIVESOver the last three decades, the derivatives market has seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are:1. Increased volatility in asset prices in financial markets,2. Increased integration of national financial markets with the international markets,3. Marked improvement in communication facilities and sharp decline in their costs,4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and5. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets.TYPES OF DERIVATIVES:1. Forward Contract: Aforward contractis a private agreement between two parties giving the buyer anobligationto purchase anasset(and the seller anobligationto sell anasset) at a set price at a future point in time.

2. Future Contracts:A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in the future. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.

3. Option ContractsAnoptions contractis an agreement between a buyer and seller that gives the purchaser of theoptionthe right to buy or sell a particular asset at a later date at an agreed upon price.Options contractsare often used in securities, commodities, and real estate transactions.

COMPARATIVE ANALYSIS

BasisEquityDerivative

ReturnCapital appreciationDividend IncomeCapital gainPrice Fluctuation

RiskCompany SpecifiedSector specifiedGlobal riskGeneral Market RiskMarket riskCredit riskLiquidity riskSettlement risk

Types of marginVaRExtreme LossMark to marketInitial marginExposure marginPremium margin

DurationGenerally Long term (more than 1 yr)Short term(Max. 3 months)

ParticipantsLong term Investors HedgersSafe InvestorsSpeculationsArbitragersHedgers

Expiry Date of contractNo such thingsLast Thursday of any month