As of April 2018, the BSE is the world’s 10th largest stock exchange with an overall market capitalization of more than US$2.3 trillion.
On the other hand, NSE has a total market capitalization of more than US$2.27 trillion, making it the world’s 11th largest stock exchange.
- Definition / Scope
- Market Overview
- Market Risks
- Top Market Opportunities
- Market Trends
- Industry Challenges
- Technology Trends
- Regulatory Trends
- Market Size and Forecast
- Market Outlook
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
Stock market is the collection of market and exchanges where shares in corporations are issued and traded. Stock market consists of two markets – primary and secondary market.
In primary market, new issues are first sold through IPOs. Whereas in secondary market, investors buy and sell securities they already own.
There are many different players associated with the stock market, including brokers, companies, investors, portfolio managers, stock analysts, etc.
India has two major stock exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE was established in 1875. The NSE, on the other hand, was founded in 1992 and began operations in 1994.
BSE is Asia’s first and the fastest exchange stock exchange in the world and NSE is the leading stock exchange in India and the fourth largest in the world by volume in 2015.
Both the major exchanges of India follow same trading mechanisms, settlement process and trading hours. The BSE has more listed firms than NSE. As per the latest count, the BSE had about 4,700 listed firms compared to NSE which had only 1,200 listed firms.
Out of all the listed firms in BSE, only about 500 firms represents more than 90% of its market capitalization. The significant firms of India are listed on both the exchanges.
The two main indexes in Indian stock market are Sensex and Nifty. Sensex includes shares of 30 firms listed on BSE, which represents 45% of the index’s free-float market capitalization.
Another index, S&P CNX Nifty includes 50 firms listed on the NSE, which represents around 62% of its free-float market capitalization.
As on Sep 22, 2018 the S&P BSE Sensex was 36,841.60 and the NIFTY 50 was 11,143.10.
The table below shows the Sensex from the year 2008-2017. Within a decade the Sensex has decreased from 20,000 to 8,000 and again increased up to 32,000.
The possibility of high net worth individuals selling their equity holdings and investing in real estate is a key risk for the Indian stock market. Investment in real estate and stock market has negative relation.
As the residential property cycle turns up, the stock market drags down. People start to sell their stocks and buy real estates.
The government changes tax frequently and hence may cause negative impression on the stock investors. The taxes may increase or decrease in the particular industry and affect stock price. As taxation is controlled by the government, there is not much that the management or investors can do.
The global market interest rates changes time to time. And this can positively or negatively affect the stock depending on the direction in which the interest rate is moving. The stock market declines as the interest rate increases.
Top Market Opportunities
Stock market is one of the best places to make money from investment. There are number of people with average incomes who have ended up improving their worth by investing in stocks.
Foreign entities and individuals can gain exposure to Indian stocks through institutional investors.
Retail investors have the option of investing in ETFs and ETNs based on Indian stocks.
Currently only very few percentage of the household savings of Indians are invested in the stock market , but with GDP growing at 7-8% annually , more money is expected to come into the market.
One of the reports estimated that only about 1.3% of India’s population invested in stock market, as compared to 27% in USA. The SEBI chief has targeted an optimistic figure of 8% for retail participation.
The main factor that drives growth in stock market is rise in the price of the stocks. The drivers for the rise in price of the stocks are as follows:
- Financial Performance of the Companies – The financial results of any company play a vital role in volatility of the stock of that particular company. Overall good results drives up the share price of that company and this scenario will give big push to the fundamentals of the market.
- RBI Monetary Policy – RBI is one of the important factors for stock market. The rise in interest rates by RBI will drag the market down and vice versa. There is negative relation between interest rate and stock market.
- US FED Reserve Policy – US FED rates hike will have a global impact especially on emerging markets. Stock market has the most relevant impact.
- Political reasons – Good political news drives the market up and negative news drags the market down.
- Demand and supply – If there is greater number of buyers than seller, the buyers bid up the prices of the stocks to entice sellers to get rid of them.
The Government of India has put the FDI limit and different ceilings for different sectors. FDI ceilings fall in the range of 26-100%. The maximum limit for portfolio investment in a particular firm depends upon the FDI limit imposed for the sector to which the firm belongs.
The total limits of investment by all foreign inclusive investor (FIIs), including their sub-accounts in any particular firm, have been fixed at 24% of the paid-up capital.
Also, investment by any one FII in any particular firm should not be more than 10% of the paid-up capital of the company. Regulations allows a separate 10% ceiling on investment for each of the sub-accounts of FII.
The several issues faced by retail investors also restrain the growth in this market. The problem ranges from the difficulties for investors in opening a demat account to price manipulation, poor grievance redressal and the lack of proper guidance.
To open a demat account an investor has to go through burdensome KYC procedures. The charges involved in opening and maintaining a demat account are too high and not in favour of retail investors. They have to spend around Rs 500 – Rs 3,500 just to open an account and then are other account maintenance and transaction charges.
The broker ignores small investor for big investor in greed of high commissions. Also, due to lack of proper regulation, portfolio management services are no better in servicing clients.
NSE launched electronic screen-based trading in 1994 and internet trading in 2000. NSE is a pioneer in technology and ensures the reliability and performance of its systems through a culture of innovation and investment in technology.
NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors.
NSE has also created the National Securities Depository Limited (NSDL) which allows investors to securely hold and transfer their shares and bonds electronically. NSE‘s trading system is a state-of-the-art application.
It has an up time record of 99.99% and processes more than a billion messages every day with sub millisecond response time. The settlement cycle has been reduced to T+2/T+1 from T+3.
NSE is also the first exchange in the world to use satellite communication technology for trading. It uses satellite communication technology to energize participation from about 2,956 VSATs from nearly 245 cities spread across all over the country.
NSE has also put in place NIBIS (NSEs Internet Based Information System) for online real time dissemination of trading information over the Internet.
The Indian Stock market is regulated by Securities & Exchange Board of India (SEBI). SEBI was formed in 1992 as an independent authority and was given statutory powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament.
SEBI lays down rules for Indian stock market in line with the best market practices. It enjoys vast powers of imposing penalties on market participants.
SEBI is responsible to the needs of three groups which include the issuer of securities, investors and market intermediaries. The main function of SEBI is to protect the interests of investors in securities, promote the development of and regulate the securities market.
Recently, the SEBI has softened its earlier restrictions on NRI investments into the stock market. An NRI can hold up to 25% of a foreign fund’s assets .
Market Size and Forecast
As of April 2018, the BSE is the world’s 10th largest stock exchange with an overall market capitalization of more than US$2.3 trillion. On the other hand, NSE has a total market capitalization of more than US$2.27 trillion, making it the world’s 11th largest stock exchange.
Vaidyanathan (2016) estimates that only about 4% of the Indian economy is derived from the stock exchanges in India. Economic Times estimated that as of April 2018, 60 million retail investors had invested their savings in stocks in India.
The retail participation has declined from 20 million in the 1990s to 12 million in 1999, and just around 8 million in 2009, despite the fact that the Sensex has grown by 20 times during the same period.
The chart below shows the stock market capitalization as percent of GDP from the year 2003 to 2016. The average value for India during that period was 76.18 percent with a minimum of 46.55 percent in 2003 and a maximum of 151.45 percent in 2007.
Stock market capitalization of about 50 percent of GDP and more is an indication of a well-developed stock market.
The year 2017 had been a great one for the BSE Sensex and the NSE Nifty. Both the indexes rose 30% in 2017. Most of the global brokerages are of the view that the bull run would continue in 2018.
As per the forecast, the benchmark Nifty will deliver returns of 10-15% by December 2018 on supportive global economic growth.
Top global brokerage Goldman Sachs is of the view that the Nifty 50 will touch 11,600 by December 2018. Credit Suisse is overweight on energy, metals, PSU banks, and IT sectors for the year 2018.
Equity strategists are basing their expectation on strong corporate earnings, supportive global economic growth and gradual improvement in business segment.
NSE is the largest stock exchange in India whereas BSE is the oldest exchange. NSE has a turnover of around 5-7 times that of BSE. Both BSE and NSE have very similar fee structure. Most of the large cap scrips are available for trades in both exchanges. But lots of small and mid caps are largely present only in BSE.
BSE has more scrips listed when compared with that of NSE. In BSE, 5,439 companies are listed compared to 1,952 in NSE. If we consider liquidity, NSE is better than BSE. NSE is popular than BSE because of the screen based trading which was firstly available in NSE. IT system and compliance is also superior to BSE.
Key Market Players
The key market players are Investment banks, FII’s, Indian family offices and Indian Institutional investors.
- Investment banks – They work actively as dealers and brokers and also make investments on particular assets. Barclay’s India, ICICI-securities, Goldman Sachs are some of the main investment banks in India.
- FII – It refers to outside companies investing in the financial markets of India. Bridgewater Associates, Berkshire Hathaway, GPIF are some of well-known names of FII.
- Indian family offices – Family offices are private wealth management advisory firms that serve ultra-high net worth investors. Ambani Brothers, Premji Invest are some of the family offices in India
- Institutional investors – It refers to non-bank person or organization that trades securities in large enough share quantities. Mutual funds, commodity advisors, individual players are some of the institutional investors.
Some of the major successful investors in Indian stock market are Rakesh Jhunjhunwala, Radhakishan Damani, Ramesh Daman, Raamdeo Agrawal, etc. Rakesh Jhunjhunwala, also known as “India’s Warren Buffet” and “The Big Bull” is one of the successful stock market investor in India.
According to Forbes 2016, Jhunjhunwala is India’s 53rd richest person. RK Damani invests in the long term, like 5 to 10 years. Raamdeo Agrawal investing strategy is based on QGLB: Quality, growth, longevity and bargain value of a company.
Most of the trading in Indian stock market takes place at National Stock Exchange and Bombay Stock Exchange. The overall responsibility of development and regulation of stock market rests with SEBI.
Currently, though very few people are investing in domestic stock market, but with the GDP growing at 7-8% annually more money will enter the stock market. Gradually Indians are realizing the benefits of investing in stocks and are showing willingness to enter the market.
Investing in stock market is a great opportunity to build large asset value for those who are willing to be consistent savers, appropriately manage their risk, are patient and make the necessary time and energy to gain experience.
- BSE – Bombay Stock Exchange
- FII – Foreign Inclusive Investor
- GDP – Gross Domestic Product
- IPO – Initial Public Offering
- NSDL – National Securities Depository Limited
- NSE – National Stock Exchange
- RBI – Reserve Bank of India
- SEBI – Securities Board of India
- US – United States