History Of The Stock Market Essays


In this research we will attempt to the study the history and evolution of National Stock Exchange as one of the leading capital market platforms of the country and its importance for the Indian economy.


Traditionally, banks have been a prime source of finance for organizations all around the world. The banks are those financial institutions, which accept deposits and extend loans to the companies and during the entire course, make an effort to earn some profits so that healthy returns could be offered to the investors. From years, banks have been top most choice of financial managers to raise funds for their business enterprises, but during past few time due to ongoing recession and financial crisis, people are increasingly losing their faith in banking system.

The last few years have seen the emergence of alternatives to bank funding. These alternatives have offered customized solutions to the funding needs of various corporate entities all over the globe. Some of these are private equity, public offerings, private placements etc. Out of these instruments like public offerings, private placements are classified into the category of capital market funding. This channel uses the funds available with various market players like banks, financial institutions, retail investors and various funds for fulfillment of the needs of the corporate entities.

The development of capital market has not been limited to the developed countries alone. Emerging markets have also made significant progress in development of capital market channels for the purpose of fund raising. One of the reasons for the same has been the attractiveness of these markets in terms of the growth potential offered by them to the investors.

India has been one of the leading emerging market economies. It is one of the fastest growing economies in the world. The growth in the economy has been accompanied by a rise in the industrial and business activity in the country. The steep growth has brought about a spurt in the fund raising requirements and in turn led to the development of capital markets.

Alongside the development in capital markets, there has been a development in the capital market platforms. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are two of the leading platforms in India. In this research, we will try and track the evolution of National Stock Exchange as the leading exchange platform, the products offered on the same and its importance for the growth of the Indian economy as a whole.

The reasons behind performing this research are presented as follows:

  • National Stock exchange has made significant progress since its inception and has become the leading platform in the country. Identification of the factors that have led to the same can be useful for development of market platforms worldwide.

  • National Stock Exchange has successfully diversified into various products like currencies, derivatives and debt. We will try and figure out the synergies between introduction of multiple products and whether dominance in one can help the platform in other.

The personal reasons for taking up this research are as follows:

  • Understanding the evolution of National Stock Exchange can help us in gaining useful insights into the functioning of capital market platform in a country like India.

  • The research will also help us in understanding the different markets like debt, equity as well as currency in the Indian context. This will be possible as NSE is the main exchange for all of these markets in India.

Research Objectives

The specific objectives associated with this research are presented as follows:

  • To identify the main reasons for the emergence of national stock exchange as the main capital platform in the country

  • To identify the various aspects of the different product platforms offered at national stock exchange

  • To study the problems associated with the Indian stock markets and the role that a capital market platform like national stock exchange can do to rectify the same

  • To identify the strengths of national stock exchange vis-�-vis its main rivals

  • To identify the weaknesses of national stock exchange vis-�-vis its main rivals

  • To identify the opportunities for national stock exchange in the present context

  • To identify the threats faced by the national stock exchange from the existing and new rivals

Preliminary Literature Review

The financial markets in a country shape its present as well as its future growth and development. The financial markets cover a wide range of markets from capital market, debt market, hybrid market, credit market, money market, stock market, bond market, hedge funds, mutual funds, commodity market, derivative markets and all other markets that involve the transactions of financial assets. The basic supply and demand of money hence play a huge impact on the financial markets. And financial markets in turn play a huge impact on the country's GDP (Gough, 1997). The players include those who want capital and those who have capital, such as lenders (companies and individuals), financial intermediates (banks and mutual funds), financial markets (bourses and other markets) and borrowers (individuals, companies and government). There have been various studies to determine the behavior of each group to the financial markets, how prices changes, due to what factors, the volatility of the change, over what time frame and how the monetary policies impacts the flow of the financial markets. (Kripalani, 2008; Mishkin, 2007) With technical and fundamental and quantitative analysis the conclusions reached show an in depth study of the markets and their behavior with respect to every change. Various cycles of growth, expansion, recessions and depression and again growth have helped analyst's not only to predict the changes in an economy but device methods used to prevent any harmful changes though their monetary policies. With the advent of globalization the financial markets received an instant boost world over making it a global village. But recently even the most powerful economy is undergoing recession for over a year. A thorough study of the global financial markets is hence essential to understand these tough times. (Neave 1988)

Capital markets in India have been essential channels for the growth of the country. The national stock exchange has emerged as one of the leading market platforms in this growth story. National stock exchange and the Bombay stock exchange have both been the major platforms for primary and secondary equity markets. The national stock exchange has upstaged its older rival on account of the better facility and effective management driven by a much more professional management.

National stock exchange has also captured a large chunk of the volumes in the derivative segment which again puts it at advantage vis-�-vis others in getting the spot volumes of traders looking for any arbitrage opportunities in the market. The variety of benchmark indices offered by the national stock exchange also provides an advantage to it compared to its rivals. The main index of the national stock exchange, NIFTY 50 is a representation of the main sectors of the economy. Each of the sectors gets a proportionate representation on the basis of its position in the market. The proportion of the stock in the index is decided by the free float market capitalization (capitalization calculated on the basis of the non promoter holding) of the company. The other benchmark indices are also designed innovatively so as to generate the interest of the investors in same. (Rutterford 1993)

There is a Junior NIFTY index which provides a representation of the second tier stocks especially for investors looking for a higher level of risk and return profile. Then there are sector specific indices like Bank NIFTY and Information Technology NIFTY which allow investors to take sector specific exposure. There are derivative products designed for each of these sector specific indexes which leads to higher traded volumes on the exchange and maximizes the revenues.

National Stock exchange has also focused on the importance of participation of the retail investors in the capital markets of the country. As a part of this focus, the national stock exchange has introduced "mini" versions of its products which allow the investors to buy a smaller sized lot in the derivative segment. This has led to an increased participation by the retail investors and helped national stock exchange in capturing large business volumes.

National stock exchange has also diversified into other products like debt, currency and interest rate futures. This has helped it in garnering additional volumes and revenues. The debt platform has segments for both the retail and wholesale trades. The exchange has also captured a significant share in the corporate bond settlement activity in the country (Economy Watch 2007).

National stock exchange is also the leader in the INR-Dollar interest rate futures in the country. The majority market share in this segment which has been started only recently shows the capabilities of national stock exchange in the capital markets. With the Reserve bank of India allowing trade in other currency pairs like INR-Euro and INR-JPY, national stock exchange is expected to further strengthen its position in the currency futures market in the country (Nilekani, 2009).

Finally, another ability of national stock exchange that stands out is its ability to execute the plans swiftly to gain the upper hand in the markets. This was evident from the manner in which it was able to start a comprehensive platform for interest rate futures in a better manner than its rivals (Sheffrin 2003).

Research Methodology

We would use both qualitative analysis and quantitative analysis for our research. The qualitative analysis would be done by the use of available literature and case studies on use of capital markets as an alternate channel to bank finance for the organizations looking to raise funds. We will also look at the case studies on the evolution of national stock exchange as the leading market platform in the country.

The analysis would involve study of different modes of fund raising possible in capital markets and the manner in which an exchange platform can gain competency for acting as a channel in each mode of fund raising. We will also perform a SWOT analysis for national stock exchange vis-�-vis its rivals and develop a roadmap for making capital markets even more effective for the purpose of fund raising and making national stock exchange an even larger player in the same. The different components of our research methodology are described as follows:

Key Concepts in Research


Validity is a measure of causal relationships between two variables. In a research, there is a possibility of one variable being correlated with the other. The presence of causality indicates the validity of the research. The validity in a relationship can be checked by controlling the other possible influencers of a relationship between two variables.


The reliability of an analysis is determined by the following criteria:

  • Presence of same results in case the observations are repeated again and again
  • Presence of same observations in case the experiment and research are performed by a different set of individuals and test subjects
  • Transparency in the use of raw data; this is ensured by documenting all the aspects associated with data and its interpretation
  • Generalizability

    This aspect ensures whether the results obtained from a research can be applied in a wider realm or whether they are applicable in real life conditions. In our case generalisability would refer to the ability of our recommendations and observations to hold in emerging markets other than India and probably even in developed markets.

    Research Families

    Qualitative Research

    The information obtained from exchange management team, secondary data research and discussions with capital market participants and regulators is sometimes not sufficient enough to develop a thorough understanding of the problem. Qualitative research is exploratory and unstructured in nature and tries to perform a root cause analysis of the different factors that have helped national stock exchange in getting a leadership position in the Indian capital markets.

    Quantitative Research

    Quantitative research will involve the use of numerical data for the use of making decisions on the hypotheses and for making appropriate recommendations. Quantitative research would be performed by a detailed analysis of all the numbers associated with the research. The information would be used according to the demands of the research questions and hypotheses. Simple mathematical tools like ratios, correlations and growth rates would be essential for us in this part of the methodology.

    Primary Data

    Primary data is the data obtained directly from the source by the researcher. In the case of our study the primary data would be obtained from discussions and interviews with exchange management team, regulators and capital markets experts. Some primary data will also be obtained by data provided by some stock exchanges and market platforms. We will also try and obtain information relating to the strengths of national stock exchange from some of the companies that have used national stock exchange as a channel for fund raising. The primary data obtained by means of interviews and discussions will be obtained mainly from India. Telephonic and email channels would be used for obtaining primary data communications from other geographical regions.

    Secondary Data

    Secondary data is data collected from third part sources like internet, newspapers and other research publications. This data may not exactly relate to the primary objective of the research but provides useful inputs for the research.

            The benefit of using secondary data is that it is economical and quick to get. Analysis of secondary data is essential for problem development and also developing the final conclusions.

    Research Approach

    The approach to the problem is akin to a structured method that is being developed for accomplishing the objective i.e. to find the solutions to the questions and recommendations for the issues. The approach to the problem consists of the following components:

  • Theoretical Framework- Theoretical framework is the set of past research and concepts that are used to derive conclusions obtained from the primary and secondary research carried out by the researcher.
  • Analytical Models- Analytical model is a representation of a relationship between a set of variables. The relationship uses quantitative data to bring out a qualitative conclusion. The variables are generally the different aspects of the marketing research problem.
  • The research approach that would be used by us in this case will be based on the case study method. In this method, we will use information obtained from primary and secondary sources to define our problem, the main aspects of the problem and the alternative solutions for the same. The alternative solutions would be identified based on the data available to us and the theoretical concepts studied by us. Knowledge from the literature research will also be used as a part of our approach. The research approach would involve definition of research questions and hypotheses based on our research objectives.

    Ethical issues

    Some of the ethical issues that could be associated with our research and the steps that we will take to prevent the biases arising from the same are presented as follows:

  • There is an inclination to align the observations and conclusions obtained from a research with the existing researches. This inclination arises from the risk of being proved wrong on taking a contrarian approach. In our case, the observations would be based both on qualitative and quantitative data. The biases present in qualitative data could be eliminated and detected by the use of quantitative data which is available in public domain and hence is easily verifiable.
  • There is an inclination towards making open ended conclusions and inferences. This arises from the absence of conviction towards taking a particular view. We will try and eliminate this by trying to take a firm view on issues at hand except in the cases where ambiguity of data prevents us from doing the same.
  • There is a possibility of existing views of the researcher on the issue influencing the observations, conclusions and recommendations being made in the research. We will try and eliminating these biases by presenting the different views viz. those of bankers, experts and our own views along with the rationale for each of these views. The conclusions and recommendations will be made on the basis of the most convincing and justifiable rationale.


    Economy Watch. 2007. Indian Capital Market. [Online] http://www.economywatch.com/market/capital-market/indian.html [Accessed March 04, 2010 8:00am]

    Gough, L. (1997), How the Stock Market Really Works, London: FT Pitman Publishing

    Kripalani, M. (2008), What is Rolling India's Stock Market? Bonds, Business Week, 4071:58-59.

    Mishkin, F.S. (2007), The Economies of Money, Banking and Financial Markets, 6th Edition, Boston, Mass : London : Pearson Addison - Wesley

    Neave, E. H. (1988), Financial Systems: Principals and Organization, London Routledge

    Nilekani, N., (2009).Imagining India. Oxford Oxfordshire: Oxford University Press.

    Rutterford, J. (1993), Introduction to Stock Exchange Investment, 2nd Edition, Basingstoke : Macmillan Press Ltd

    Sheffrin, S.M. (2003),Economics: Principles in action, Upper Saddle River : Pearson Prentice Hall, pp.283

    Source: Essay UK - http://www.essay.uk.com/free-essays/business/history-evolution-of-national-stock-exchange.php

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