Stock Market

Stock Market

Capital Markets
Capital markets refers to the
institutional arrangement through
which long term funds, both debt and
equity, are raised and invested
There are 2 types of capital markets:

Primary Markets
The primary markets is also known as new issue
market in which new securities are issued for
the first time.
Methods of floating new issue in the primary
markets :
Offer through prospectus
Offer for sale
Private placement
Rights issue
e-IPOs

A stock market or equity

market is a public entity for
the trading of company
stock (shares) and
derivatives at an agreed
price. These are securities
listed on a stock exchange
as well as those only traded
privately. This market exists
for sale and purchase of
existing securities / shares.
The size of the world stock
market was estimated at
about $36.6 trillion at the
beginning of October 2008

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 stock markets help
the existing investors to disinvest and new investors to
enter the market, therefore, it provides liquidity and
marketability to existing securities

Trading on stock exchange

Participants in the stock market range from small individual stock
investors to large hedge fund traders, who can be based anywhere
in the world. Their orders usually end up with a professional at a
stock exchange, who executes the order of buying or selling.
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. 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.

some of the examples of stock exchange Trading in different countries.

The New York Stock Exchange (NYSE) is a physical

exchange, also referred to as a listed exchange only
stocks listed with the exchange may be traded, with a
hybrid market for placing orders both electronically and
manually on the trading floor.
The NASDAQ is a virtual listed exchange, where all of the
trading is done over a computer network. The process is
similar to the New York Stock Exchange. However, buyers
and sellers are electronically matched. One or more
NASDAQ market makers will always provide a bid and ask
price at which they will always purchase or sell 'their'
stock.
The Paris Bourse, now part of Euro next, is an orderdriven, electronic stock exchange. It was automated in
the late 1980s. Prior to the 1980s, it consisted of an open
outcry exchange. Stockbrokers met on the trading floor or
the Palais Brongniart. In 1986, the CATS trading system
was introduced, and the order matching process was fully

Market participants include individual retail investors,

institutional investors such as mutual funds, banks, insurance
companies and hedge funds, and also publicly traded
corporations trading in their own shares.
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 exchange from the listed securities,
facilitating price discovery.

Major Stock Markets over

the World
New York Stock Exchange (NYSE),
United States
Toronto Stock Exchange, Canada
Amsterdam Stock Exchange, Europe
London Stock Exchange, Europe
Nigerian Stock Exchange, Africa
Philippine Stock Exchange, Asia
Singapore Exchange, Singapore
The Bombay Stock Exchange, India

Raising capital for businessesExchanges help companies to capitalize by

selling shares to the investing public.
Mobilizing savings for investmentThey help public to mobilize their savings
to invest in high yielding economic sectors, which results in higher yield, both to
the individual and to the national economy.
Facilitating company growthThey help companies to expand and grow by
acquisition or fusion.
Profit sharingThey help both casual and professional stock investors, to get
their share in the wealth of profitable businesses.
Corporate governanceStock exchanges impose stringent rules to get listed in
them. So listed public companies have better management records than
privately held companies.

The National Stock Exchange (NSE) is stock exchange located in

Mumbai, India. National Stock Exchange (NSE) was established in
the mid 1990s as a demutualised electronic exchange. NSE
provides a modern, fully automated screen-based trading system,
with over two lakh trading terminals, through which investors in
every nook and corner of India can trade. NSE has played a critical
role in reforming the Indian securities market and in bringing
unparalleled transparency, efficiency and market integrity.
NSE has a market capitalization of more than US$0.989 trillion and
1,635 companies listed as of July 2013. Though a number of other
exchanges exist, NSE and the Bombay Stock Exchange are the two
most significant stock exchanges in India, and between them are
responsible for the vast majority of share transactions. NSE's
flagship index, the CNX NIFTY 50, is used extensively by investors
in India and around the world to take exposure to the Indian
equities market.

It is India's largest exchange, globally in cash market

trades, in currency trading and index options. NSE has
diversified shareholding. There are many domestic and
global institutions and companies that hold stake in the
exchange. Some of the domestic investors include LIC,
GIC, State Bank of India and IDFC Ltd.
It is India's largest exchange, globally in cash market
trades, in currency trading and index options. NSE has
diversified shareholding. There are many domestic and
global institutions and companies that hold stake in the
exchange. Some of the domestic investors include LIC,
GIC, State Bank of India and IDFC Ltd. Bank of India and
IDFC Ltd.

The CNX Nifty, also called the Nifty 50 or simply the Nifty, is a stock
market index and benchmark index for Indian equity market. Nifty is
owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL (Credit
Rating and Information Services of India Ltd). IISL is India's first
specialized company focused upon the index as a core product. IISL
has a marketing and licensing agreement with Standard & Poor's for
co-branding equity indices. 'CNX' in its name stands for 'CRISIL NSE
Index'.
The CNX Nifty index is a free float market capitalization weighted
index. The index was initially calculated on full market capitalization
methodology. From June 26, 2009, the computation was changed to
free float methodology. The base period for the CNX Nifty index is
November 3, 1995, which marked the completion of one year of
operations of National Stock Exchital Market Segment.

The base value of the index has been set at 1000, and a
base capital of Rs 2.06 trillion. The CNX Nifty Index was
developed by Ajay Shah and Susan Thomas. The CNX
Nifty currently consists of the following 50 major Indian
companies:
CNX Nifty has shaped up as the largest single financial
product in India, with an ecosystem comprising:
exchange traded funds (onshore and offshore),
exchange-traded futures and options (at NSE in India
and at SGX and CME abroad), other index funds and
OTC derivatives (mostly offshore).
The CNX Nifty covers 22 sectors of the Indian economy
and offers investment managers exposure to the Indian
market in one portfolio.

A stock market crash is a sudden dramatic decline of stock

prices across a significant cross-section of a stock market,
resulting in a significant loss of paper wealth. Crashes are
driven by panic as much as by underlying economic factors.
There is no numerically specific definition of a stock market
crash but the term commonly applies to steep double-digit
percentage losses in a stock market index over a period of
several days. Crashes are often distinguished from bear
markets by panic selling and abrupt, dramatic price declines.
Bear markets are periods of declining stock market prices
that are measured in months or years. While crashes are
often associated with bear markets, they do not necessarily
go hand in hand. They often follow speculative stock market
bubbles.
Stock market crashes are social phenomena where external
economic events combine with crowd behavior and
psychology in a positive feedback loop where selling by some
market participants drives more market participants to sell.

Generally speaking, crashes usually occur under

the following conditions: a prolonged period of
rising stock prices and excessive economic
optimism, a market where P/E ratios exceed longterm averages, and extensive use of margin debt
and leverage by market participants.
Example: The crash of 1987, for example, did not
lead to a bear market. Likewise, the Japanese
Nikkei bear market of the 1990s occurred over
several years without any notable crashes.

One of the most famous stock market crashes started October

24, 1929 on Black Thursday. The Dow Jones Industrial Average
lost 50% during this stock market crash. It was the beginning of
the Great Depression. The end of World War I heralded a new
era in the United States. It was an era of enthusiasm,
confidence, and optimism
On August 24, 1921, the Dow Jones Industrial Average stood at
a value of 63.9. By September 3, 1929, it had risen more than
sixfold, touching 381.2. It would not regain this level for
another 25 years. By the summer of 1929, it was clear that the
economy was contracting and the stock market went through a
series of unsettling price declines. These declines fed investor
anxiety and events soon came to a head on October 24 (known
as Black Thursday), October 28 (known as Black Monday), and
October 29 (known as Black Tuesday).

Black Tuesday was a day of chaos. Forced to

liquidate their stocks because of margin calls,
overextended investors flooded the exchange with
sell orders. The Dow fell 30 points to close at 230 on
that day. The glamour stocks of the age saw their
values plummet. Across the two days, the Dow Jones
Industrial Average fell 23%.

In finance, Black Monday refers to Monday, October 19, 1987, when stock
markets around the world crashed, shedding a huge value in a very short time.
The crash began in Hong Kong and spread west to Europe, hitting the United
States after other markets had already declined by a significant margin. The
Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74
(22.61%).In Australia and New Zealand the 1987 crash is also referred to as
Black Tuesday because of the time zone difference.) The Black Monday decline
was the largest one-day percentage decline in the Dow Jones. (Saturda.y.,
Following the stock market crash, a group of 33 eminent economists from
various nations met in Washington, D.C. in December 1987, and collectively
predicted that the next few years could be the most troubled since the
1930s. However, the DJIA was positive for the 1987 calendar year. It opened
on January 2, 1987 at 1,897 points and closed on December 31, 1987 at 1,939
points.

In 1986, the United States economy began shifting from a rapidly

growing recovery to a slower growing expansion, which resulted in
a "soft landing" as the economy slowed and inflation dropped. The
stock market advanced significantly, with the Dow peaking in
August 1987 at 2722 points, or 44% over the previous year's
closing of 1895 points.
On October 14, the DJIA dropped 95.46 points (a then record) to
2412.70, and fell another 58 points the next day, down over 12%
from the August 25 all-time high.
On Thursday, October 15, 1987, Iran hit the ship the Americanowned supertanker, the Sungari, off Kuwait's main Mina Al Ahmadi
oil port with a Silkworm missile. At 05:50 A.M. on Friday, October
16, Iran hit the ship MV Sea Isle City with a Silkworm missile.
On Friday, October 16, when all the markets in London were
unexpectedly closed due to the Great Storm of 1987, the DJIA
closed down another 108.35 points to close at 2246.74 on record
volume. American Treasury Secretary James Baker stated concerns
about the falling prices.

The dot-com bubble (also referred to as the dot-com boom, the

Internet bubble and the information technology bubble[1])
was a historic speculative bubble covering roughly 19972000 (with
a climax on March 10, 2000, with the NASDAQ peaking at 5408.60[2]
in intraday trading before closing at 5048.62) during which stock
markets in industrialized nations saw their equity value rise rapidly
from growth in the Internet sector and related fields. While the latter
part was a boom and bust cycle, the Internet boom is sometimes
meant to refer to the steady commercial growth of the Internet with
the advent of the World Wide Web, as exemplified by the first release
of the Mosaic web browser in 1993, and continuing through the
1990s.
The period was marked by the founding (and, in many cases,
spectacular failure) of a group of new Internet-based companies
commonly referred to as dot-coms. Companies could cause their
stock prices to increase by simply adding an "e-" prefix to their name
or a ".com" to the end, which one author called "prefix investing".

A combination of rapidly increasing stock prices, market

confidence that the companies would turn future profits,
individual speculation in stocks, and widely available
venture capital created an environment in which many
investors were willing to overlook traditional metrics such
as P/E ratio in favor of confidence in technological
advancements.
The collapse of the bubble took place during 20002001.
Some companies, such as Pets.com, failed completely.
Others lost a large portion of their market capitalization
but remained stable and profitable, e.g., Cisco, whose
stock declined by 86%. Some later recovered and
surpassed their dot-com-bubble peaks, e.g.,
Amazon.com, whose stock went from 107 to 7 dollars per
share, but a decade later exceeded 200.

Crash of 20082009On September 16, 2008, failures of

massive financial institutions in the United States, due
primarily to exposure of securities of packaged
subprime loans and credit default swaps issued to
insure these loans and their issuers, rapidly devolved
into a global crisis resulting in a number of bank
failures in Europe and sharp reductions in the value of
equities (stock) and commodities worldwide.
The failure of banks in Iceland resulted in a
devaluation of the Icelandic Krona and threatened the
government with bankruptcy. Iceland was able to
secure an emergency loan from the International
Monetary Fund in November.[2] In the United States,
15 banks failed in 2008, while several others were
rescued through government intervention or
acquisitions by other banks.[3] On October 11, 2008,
the head of the International Monetary Fund (IMF)
warned that the world financial system was teetering
on the "brink of systemic meltdown."

The Times of London reported that the meltdown was

being called the Crash of 2008 and older traders were
comparing it with Black Monday in 1987. The fall that
week of 21 percent was not as large a drop as the 28.3
percent fall 21 years earlier, but some traders were
saying it was worse. At least then it was a short, sharp,
shock on one day. This has been relentless all week.[5]
Business Week also referred to the crisis as a "stock
market crash" or the "Panic of 2008."[6]
Beginning October 6 and lasting all week the Dow Jones
Industrial Average closed lower for all 5 sessions.
Volume levels were also record breaking. The Dow Jones
industrial average fell over 1,874 points, or 18%, in its
worst weekly decline ever on both a point and
percentage basis. The S&P 500 fell more than 20%.

After having been suspended for three successive trading days,

i.e., October 9, October 10, and October 13, the Icelandic stock
market reopened on 14 October, with the main index, the OMX
Iceland 15, closing at 678.4, which corresponds to a plunge of
about 77% compared with the closure at 3,004.6 on October 8.
This reflects the fact that the value of the three big banks, which
form 73.2 percent of the value of the OMX Iceland 15, had been
set to zero.
On October 24, many of the world's stock exchanges experienced
the worst declines in their history, with drops of around 10% in
most indices.[12] In the US, the Dow Jones industrial average fell
3.6%, not falling as much as other markets.[13] Instead, both the
US Dollar and Japanese Yen soared against other major currencies,
particularly the British Pound and Canadian Dollar, as world
investors sought safe havens. Later that day, the deputy governor
of the Bank of England, Charles Bean, suggested that "This is a
once in a lifetime crisis, and possibly the largest financial crisis of
its kind in human history."

The May 6, 2010 Flash Crash also known as The Crash of

2:45, the 2010 Flash Crash or just simply, the Flash Crash,
was a United States stock market crash on Thursday May 6,
2010 in which the Dow Jones Industrial Average plunged
about 1000 points (about 9%) only to recover those losses
within minutes. It was the second largest point swing,
1,010.14 points, and the biggest one-day point decline, 998.5
points, on an intraday basis in Dow Jones Industrial Average
history.
On May 6, US stock markets opened down and trended down
most of the day on worries about the debt crisis in Greece. At
2:42 pm, with the Dow Jones down more than 300 points for
the day, the equity market began to fall rapidly, dropping an
additional 600 points in 5 minutes for an almost 1000 point
loss on the day by 2:47 pm. Twenty minutes later, by 3:07
pm, the market had regained most of the 600 point drop.
After almost five months of investigations led by Gregg E.

Berman,[6][7] the U.S. Securities and Exchange

Commission (SEC) and the Commodity Futures Trading
Commission (CFTC) issued a joint report dated September
30, 2010 and titled "Findings Regarding the Market Events
of May 6, 2010" identifying the sequence of events leading
to the Flash Crash
The joint report "portrayed a market so fragmented and
fragile that a single large trade could send stocks into a
sudden spiral,"[9] and detailed how a large mutual fund
firm selling an unusually large number of E-Mini S&P 500
contracts first exhausted available buyers, and then how
high-frequency traders (HFT) started aggressively selling,
accelerating the effect of the mutual fund's selling and
contributing to the sharp price declines that day.
As of July, 2011, only one theory on the causes of the flash
crash has yet been published by a Journal Citation Reports
indexed, peer-reviewed scientific journal.[41] One hour
before its collapse, the stock market registered the highest
reading of "order flow toxicity" in recent history.[41]

The authors of this paper apply

widely accepted Market
microstructure models to understand
the behavior of prices in the minutes
and hours prior to the crash.
According to this paper, "order flow
toxicity" can be measured as the
probability that informed traders
(e.g., hedge funds) adversely select
uninformed traders (e.g., Market
makers).
For that purpose, they develop the
VPIN Flow Toxicity metric, which
delivers a real-time estimate of the
conditions under which liquidity is
being provided. If the order flow
becomes too toxic, market makers
are forced out of the market. This
cascading effect has caused
hundreds of liquidity-induced crashes

The mathematical characterization of stock market movements has

been a subject of intense interest. The conventional assumption has
been that stock markets behave according to a random log-normal
distribution Among others, mathematician Beloit Mandelbrot
suggested as early as 1963 that the statistics prove this assumption
incorrect. Mandelbrot observed that large movements in prices (i.e.
crashes) are much more common than would be predicted in a lognormal distribution. Mandelbrot and others suggest that the nature of
market moves is generally much better explained using non-linear
analysis and concepts of chaos theory. This has been expressed in
non-mathematical terms by George Soros in his discussions of what
he calls reflexivity of markets and their non-linear movement. George
Soros said in late October 1987, 'Mr. Robert Preacher's reversal
proved to be the crack that started the avalanche'.

Research at the Massachusetts Institute of

Technology suggests that there is evidence the
frequency of stock market crashes follows an
inverse cubic power law.

Tobias Pries and his cull leagues Helen Susannah Moat and
H. Eugene Stanley introduced a method to identify online
precursors for stock market moves, using trading
strategies based on search volume data provided by
Google Trends. Their analysis of Google search volume for
98 terms of varying financial relevance, published in
Scientific Reports, suggests that increases in search
volume for financially relevant search terms tend to
precede large losses in financial markets

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