Page 27 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes Stock market created a unique history: The entire market was gripped by what is known as
"share fever". The American Civil War created cotton famine. Indian cotton manufacturers
exploited this situation and exported large quantities of cotton. The resulting increase in export
earnings opened opportunities for share investments. New companies started to come up.
Excessive speculation and reckless buying became the order. This mania lasted up to 1865.
It marks end of the first phase in Indian stock exchange history. With the cessation of the Civil
War, demand for Indian cotton slumped abruptly. Shares became worthless of paper. To be
exact, on July 1, 1865 all shares ceased to exist because all time bargains which were matured
could be fulfilled.
We find another distinct phase during 1866-1900. The mania effect haunted the stock exchange
during these 25 years. Above everything else, it led to foundation of a regular market for
securities. Since the market was established in Bombay, it soon became and still is the leading
and the most organized stock exchange in India. A number of stock brokers who geared up
themselves, set up a voluntary organization in 1887, called Native Share and Stockbrokers
Associations. The brokers drew up codes of conduct for brokerage business and mobilized
private funds for industrial growth. It also mobilized funds for government securities
(gilt-edged securities), especially of the Bombay Port Trust and the Bombay Municipality.
A similar organization was started at Ahmedabad in 1894.
Political development gave a big fillip to share investment. The Swadeshi Movement led by
Mahatma Gandhi encouraged indigenous trading and the business class to start industrial
enterprises. As a result, Calcutta became another major centre of share trading. The trading was
prompted by the coal boom of 1904-1908. Thus the third stock exchange was started by Calcutta
stock brokers. During inter-war years demand of industrial goods kept increasing due to British
involvement in the World Wars. Existing enterprises in steel and cotton textiles, woollen textiles,
tea and engineering goods expanded and new ventures were floated. Yet another stock exchange
was started at Madras in 1920.
The period 1935-1965 can be considered as the period of development of the existing stock
exchanges in India. In this period, industrial development planning played the pivotal role of
expanding the industrial and commercial state of the independence seven stock exchanges were
functioning located in the major cities of the country. Between 1946 and 1990, 12 more stock
exchanges were set up and, the country moved to form 19 stock exchanges by 1990.
Currently there are 23 stock exchanges in India, including the over the counter exchange of India
for providing trading access to small and new companies. The minimum issued and paid up
equity capital for a listed company has risen from 24 lakh in 1948 to 3 crore in 2009. The
number of listed companies has crossed the 8000 figure and it is equally important to not that the
network of Indian stock exchanges is spread through the length and width of the country.

1.3.2 Stock Market Indices

An Index is used to give information about the price movements of products in the financial,
commodities or any other markets. Financial indexes are constructed to measure price movements
of stocks, bonds, T-bills and other forms of investments. Stock market indexes are meant to
capture the overall behaviour of equity markets. A stock market index is created by selecting a
group of stocks that are representative of the whole market or a specified sector or segment of
the market. An Index is calculated with reference to a base period and a base index value. Stock
market indexes are useful for a variety of reasons. Some of them are:
1. They provide a historical comparison of returns on money invested in the stock market
against other forms of investments such as gold or debt.

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