Page 159 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes 2. Mediocre stocks in a growth industry usually outperform the best stocks in a stagnant
industry. This points out the need for knowing not only company prospects but also
industry prospects.
Risk-return patterns: Economic theory points out those competitive firms in an industry try to
maximize their profits by adopting fairly similar policies with respect to the following:

1. The labour-capital ratio utilized by each firm.
2. Mark ups, profit margins and selling prices.
3. Advertising and promotional programmes.
4. Research and development expenditures.

5. Protective measures of the government.
At such, they have the same risk level as well as rates of return, on an average. Empirical
evidence shown by research done by Fabozzi and Francis supports this argument.

Growth Factor: All industries do not have equally good or equally bad experiences and
expectations; their fortunes keep on changing. It implies that the past is not a good indicator of
the future – if one looks very far into the future.

Did u know? This view is well supported by research. Researchers have ranked the
performance of different industries over a period of one year and then ranked the
performance of the same industries over subsequent periods of years. They compared the
ranking and obtained near zero correlations. It implies that an industry that was good
during one period of time cannot continue to be good in all periods.
Another observation is every industry passes through four distinct phases of the life cycle. The
stages may be termed as pioneering, expansion, stagnation and decline. Different industries
may be in different stages. Consequently their prospects vary. As such, separate industry analysis
is essential.

8.2.1 Classification of Industries

There are different ways of classifying industrial enterprises.

Classification by Reporting Agencies: In India, The Reserve Bank of India has classified
industries into 32 groups. Stock exchanges have made a broad classification of industry
into 10 groups.
Business media have their own classification. The Economic Times classifies industry into
10 groups and the Financial Express into 19 groups. The groups are further sub-divided.
Classification by Business Cycle: The general classification in this framework is growth,
cyclical, defensive and cyclical growth. Growth industries are characterized by high rates
of earnings expansion, often independent of business cycles. These industries are pioneers
of a major change in the state of the art i.e., innovation diffusing concerns. The ongoing
revolution in the electronics industry and communications equipments is an example of
this kind.

Cyclical industries are closely related to business cycles. Prosperity provides
consumers purchasing power and boom to industry whereas depression adversely
affects them. Consumer durables are subject to these kinds of changes.

154 LOVELY PROFESSIONAL UNIVERSITY