CHAPTER ¥ ~ Volatility in the Market place and

factors determining prices ■

5.1 Objective:

Volatility in the market place is typical to any capital market across the globe. The

volatility factor adds to the uncertainty in the markets, for which there are many

factors which are responsible for the same.

The factors, which lead to the volatile price movements, can be fundamental,

technical as well as external factors. The fundamental factors are specific to the

company or to the economy as a whole.

The technical factors can also be specific to a particular stock or to the entire market

as a whole.

The external factors can be as varied as political, good monsoon, peace talks etc. It is

quite evident that it is pretty difficult to predict the extent of the volatile movements

in stock prices as well as the indices as a whole.

There are various tools, which look and study the volatility factors and try to predict

the future movements. There are numerous concepts and tools, which studies the

Volatility like Beta and Standard Deviation etc.

The objective of the Chapter is to understand the various fluctuations that take place

not only in terms of stock prices but also other related barometers like fluctuations in

Price Earning (PE) Multiples, changing volumes of trade in Cash Market Segment

Dividend yield, Market Capitalisationof EquitiesSegment and Price / Book Value.

Page 99 of 163
TABLE-7_: Volatile PE

Month End Dt PE Month End Dt PE Month End Dt PE

Sep-03.... i 5.43 Sep-02 14.33 Sep-01 13.16
Aug-03 i 14.95 Aug-02 : 15.04 Aug-01 15.1
Jul-03 T 12.84 Jul-02 ' 14.3 Jul-01 15.15
Jun-03 ; 12.95 Jun-02 15.73 Jun-01 ; 15.76'
May-03 U.65" May-02 16.19 May-01 : t~5.8
Apr-03 13.14 "............. Apr-02 r 17.86 Apr-01 14757"
............... Mar-03 13.36 Mar-02 r 78.T* Mar-01 17.21
' Feb-03 14.42 Feb-02 19.14 Feb-01 T 2024
".................... j'an-6216.87 ' Jan-01 22722“
Dec-02 j 14.83 Dec-01 j 14.98 Dec-00 j 19.2
Nov-O^'Mli" j
Not7)F “ 15.46“ Nov-00 ! 19.22
Oct-02 | 14.47 6ct-6l 13.79" Oct-OO j 17.74'
Sep-00 ; 19.32“
!
Note: Month End Date refers to the last trading day of the respective month
Source : National Stock Exchange website www.nseindia.com ^2 W

Volatile PE

=(^Page 100 of 163^)=

Volatile PE
The above graph illustrates the volatility of Price Earning Multiple (PE). While
in September 2000, PE wasl9.32, September 2001 saw it fall by 31.88% to 13.16.
September 2002 finds a rise in PE by 8.89% over corresponding period of the
previous year and September 2003 sees a further rise in PE by 7.68% over
September 2002. If we compare in a similar manner the PE in March 2001,2002
and 2003, we find a rise of PE by 5.17% in March 2002 and fall by 26.19% in
March 2003 respectively over corresponding periods in the previous years.

Higher PE shows the higher market levels and lower PE indicates lower market
levels. PE shows the future earning potential of the companies vis a vis the price. The
higher the PE, the higher is the discounting that the market gives on the price of the
company.

PE depends on the future earnings potential, the quality of earnings, and most
importantly the quality of management in terms of professionalism, transparency etc.
So typically in the Indian context, MNC enjoy a much higher PE than its Indian
counterparts. For example HLL enjoys a much higher PE than its Indian counterparts.
In the Pharmaceuticals also the MNCs like Glaxo, Novartis enjoys a much higher PE
than its Indian counterparts

So the data clearly exhibits that PE has remained volatile over the years confirming
the fact the stock market plays and lives on volatility.

Page 101 ofl63

TABLE- 8: Business Growth of Cash Market Segment

Month/ Year Turnover (Rs Cr) Average Daily Turnover (Rs Cr)
1994-95 1805 17
1995-96 67287 276
1996-97 295403 1176
1997-98 370193 1520
1998-99 414474 1651
1999-00 839052 3303
2000-01 1339510 5337
2001-02 513167 2078
2002-03 617989 2462
Apr-03 48971 2449
May-03 54690 2604
Jun-03 61586 2933
Jul-03 78878 3429
Aug-03 85347 4267
Source: National Stock Exchange - www.nseindia.com

Page 102 of 163

Business growth in Cash Market segment:
• Turnover in Cash Market Segment
A stupendous growth of 34137.62% was visible when turnover in the Cash
Market segment grew from a mere Rs. 1800cr in 1994-95 to Rs.617989 cr. in
2002-03. Over the years in between, barring a dip in 2001-02 by 61.69% over
previous year, the turnover in Cash Market segment has been showing a
rising trend whereby 1995-96, 1996-97, 1997-98, 1998-99, 1999-00, 2000-
01, and 2002-03 saw growth of 3627.81%, 339.02%, 25.32%, 11.96%,
102.44%, 59.65% and 20.43% respectively over their respective previous
years.
• Average Daily turnover in Cash Market Segment
The graph of the average daily turnover in Cash Market segment shows a
similar trendline as that of turnover in Cash Market Segment showing a fall in
2001-02 by 61.06%.
The higher the market levels the higher the turnover.

Page 103 of 163

TABLE-y_: Changing Dividend Yield

Month End Dt Div Yield Month End Dt Div Yield Month End Dt Div Yield
Sep-03 1.87 Sep-02 2.23 Sep-01 1.64
Aug-03 1.93 Aug-02 1.95 Aug-01 1.37
Jul-03 2.23 Jul-02 2.2 Jul-01 1.17
Jun-03 2.62 Jun-02 1.34 Jun-01 0.89
May-03 2.95 May-02 1.39 May-01 0.81
Apr-03 2.98 Apr-02 1.42 Apr-01 0.6
Mar-03 2.93 Mar-02 1.34 Mar-01 1.13
Feb-03 2.46 Feb-02 1.27 Feb-01 1.12
Jan-03 2.51 Jan-02 1.73 Jan-01 1.15
Dec-02 2.4 Dec-01 1.55 Dec-00 1.24
Nov-02 2.49 Nov-01 1.5 Nov-00 1.25
Oct-02 2.21 Oct-01 1.61 Oct-OO 1.37
Sep-00 1.26
Note : Month End Date refers to the last trading day of the respective month
Source : National Stock Exchange website www.nseindia.com

Changing Div Yield

-iPA'
<$>^^ ^ ^ ^ ^
& & jS> 5S3^<55 ^.5S5 #sS3
TABLE-IQ/ Market Capitalisation of Equities Segment

Month No of Market Month No of Market Month No of Market

End Listed Capital­ End Listed Capitalisation End Listed Capital­
Companies isation (Rs Companies (Rs Crore) Companies isation
Crore) (Rs
Crore)
Sep-03 883 863481 Sep-01 789 575242 Sep-99 679 686740
Aug-03 873 836651 Aug-01 788 57460 Aug-99 671 668187
Jul-03 865 719145 Jul-01 786 569797 Jul-99 669 593651
Jun-03 853 678550 Jun-01 785 592437 Jun-99 667 529468
May-03 847 612530 May-01 789 653847 May-99 660 503911
Apr-03 830 537133 Apr-01 790 657847 Apr-99 662 445380
Mar-03 818 581985 Mar-01 785 789600 Mar-99 648 491175
Feb-03 818 572277 Feb-01 782 807641 Feb-99 644 452081
Jan-03 814 672862 Jan-01 778 760391 Jan-99 636 449221
Dec-02 809 645388 Dec-00 767 764177 Dec-98 635 419865
Nov-02 805 606788 Nov-00 767 707121 Nov-98 630 389442
Oct-02 803 599603 Oct-OO 764 730350 Oct-98 631 394316
Sep-02 801 632618 Sep-00 758 756959 Sep-98 630 425100
Aug-02 799 608643 Aug-00 751 794516 Aug-98 628 406291
Jul-02 799 659991 Jui-od 747 746402 Jul-98 625 425006
Jun-02 799 631609 Jun-00 741 852554 Jun-98 620 424697
May-02 798 649551 May-00 733 790478 May-98 617 502014
Apr-02 800 636861 Apr-00 725 846391 Apr-98 615 516805
Mar-02 793 621523 Mar-00 720 1020426 Mar-98 612 481503
Feb-02 791 563683 Feb-00 716 1069770 Feb-98 611 457166
Jan-02 794 552908 Jan-00 706 951712 Jan-98 607 427517
Dec-01 794 581386 Dec-99 700 852985 Dec-97 600 471148
Nov-01 788 535846 Nov-99 691 726419 Nov-97 593 462339
Oct-01 788 509105 Oct-99 682 670062 Oct-97 590 491761
Sep-97 588 509919
Aug-97 583 550937
Jul-97 576 590482
Jun-97 569 574933
May-97 565 521818
Apr-97 555 483173
Mar-97 550 419367
Mar-96 422 401456
Mar-95 135 363350
Source: National Stock Exchange website www.nseindia.com

=( Page 105 of 163 >

Average Market Capitalisation
The above graph on Market capitalization on Equities segment is another factor
clearly exemplifying the volatility of the market. Upon analyzing data pertaining to
the same period over corresponding years, the volatile nature of the market becomes
evident.
The month of March has been compared from 1996 to 2003 where we see the following %
rise/fall in market capitalization over the corresponding month of the previous year :
+10.49% in March ‘96, +4.46% in March ‘97, +14.82% in March ‘98, +2% in March ‘99,
+107.75% in March ‘00, -22.62% in March ‘01, -21.29% in March ‘02, -6.36% in March
’03.
After March’03, i.e in 2003-04 there has been a 7.71% fall in average market
capitalization in April ’03 followed by growth of 14.03%, 10.78%, 5.98%, 16.34% and
3.21% in the subsequent months upto September ’03, thus indicating a steadily growing
market level.
Market Capitalisation denotes the overall value of the Equities listed on the Stock
Exchanges. It is derived by multiplying the Equity Capital for each company by the price

Page 106 of 163

TABLE- H- Price/Book Value
Month End Dt Price/Book Price/Book Priee/Boo
Value Month End Dt Value Month End Dt k Value
Sep-03 3.01 Sep-02 2.40 Sep-01 2.06
Aug-03 2.92 Aug-02 3.06 Aug-01 2.36
Jul-03 2.55 Jul-02 2.40 Jul-01 2.37
Jun-03 2.44 Jun-02 3.20 Jun-01 2.46
May-03 2.17 May-02 3.07 May-01 3.04
Apr-03 2.11 Apr-02 2.83 Apr-01 3.21
Mar-03 2.15 Mar-02 2.91 Mar-01 3.75
Feb-03 2.33 Feb-02 3.07 Feb-01 4.4
Jan-03 2.28 Jan-02 2.65 Jan-01 4.61
Dec-02 2.39 Dec-01 2.45 Dec-00 4.14
Nov-02 2.3 Nov-01 2.53 Nov-00 4.14
Oct 02 2.43 Oct-01 2.19 Oct-OO 3.82
Sep-oo; 4.15
Note : Month End Date refers to the last trading day of the respective month
Source: National Stock Exchange website www.nseindia.com

Price/Book Value

Page 107 of 163

 Price / Book Value
The above graph on Price / Book Value further illustrates the volatility of the
market. Upon analyzing data pertaining to the same period over
corresponding years as also price / book value of consecutive months, the
changing and volatile nature of the market becomes evident.
April to September 2003 saw a monthly growth of 2.84%, 12.44%, 4.51,
14.51% and 3.08% over subsequent months. During the same period in 2002,
the change in price / book value was more erratic -8.48% rise in May ’02
over April ’02, 4.23% rise in June over May ’02, 25% fall in price / book
value in July ’02 over June, again 27.5% rise followed by 21.57% fall in
September ’02 over August ’02.

The Price /Book Value is one of the parameters by which the market levels are
judged. The lower the price/ book value the lower is the market levels and higher
the price/ book value the higher are the levels. So there is a direct relationship
between market levels and price/book value.

So the data shows that Price / Book Value has remained volatile over the years
confirming the fact the stock market plays and lives on volatility.

5.2 Concept of Volatility:

There are various concepts of volatility, the most prominent amongst them being Beta

and Standard Deviation.

BETA: A MEASURE OF SYSTEMATIC RISK

Beta denotes the degree to which the different portfolios or individual stock’s returns

change per unit change in the return of the market portfolio. To put it differently, the

systematic risks of various securities differ due to their relationship with the market.

108 of 163
The Beta factor describes movement in a stock’s or portfolio returns in relation to that •-

of the market returns.

For all practical purposes, the market returns are measured by the returns on the Index

(Nifty) or Return on BSE SENSEX etc since the index is a good reflector of the

market.

Bi = Cov (X.Y)

Var(X)

Where

Bi = Beta of the Stock Return ‘Y’

Y = Returns on one portfolio or Stock which is the dependant variable

X = is the market returns or the Index which is the Independent Variable

Var = Square of Standard Deviation

Covariance is a statistic that measures how two variables vary together.

Bp = YWiBi
i=1

Where

Bp = Beta of the Portfolio

Wi = Percent of funds put in security ‘i’

n = No. of securities in the portfolio

Page 109 of 163

 Nifty - Volatile as Ever
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5.3 STANDARD DEVIATION : A MEASURE OF TOTAL RISK

Standard Deviation is a statistical tool which measures the fluctuations in returns due

to both systematic and unsystematic factors.

5.4 Factors Affecting Prices Other than Fundamentals

5.4.1 Speculation

A high degree of speculations is indulged in the stock exchanges. The essential

idea of speculation is the purchase or sale of a commodity or security at one time,

with the object of making a profit by its sale or purchase at another time.

There are two types of transactions in a stock exchanges i.e. investment

transactions and speculative transactions. Investment transactions refer to

purchase or sale of securities undertaken with the long-term prospect relating to

their yield and price. An investment transaction normally involves the actual

delivery of the security and payment of its fall price. Actually no stock exchange
can operate purely on the basis of investment buying and selling alone. Investment

transactions are supplemented by speculative transactions.

In a speculative transaction buying or selling, the delivery of securities or the

payments of full price are rare. Instead, only the differences are paid. The

predominance of speculative transactions over investment transactions in a stock

exchange is due to the fact, that the later involve a large volume of money, (as

securities bought have to be paid in full), while speculative transactions are

possible with smaller amounts of money (as delivery of securities and payment of

full price are rare).

Speculation is essential in a stock exchange for in its absence it is impossible to

have large volume of business. So it is very necessary for mobility and liquidity of

securities. In the absence of speculation demand and supply of any share may not

be equal and therefore there may be violent price fluctuations. For instance, if the

demand is very much more than the supply of share, the price of that share will

shoot up and the opposite will result when the supply exceeds demand. Speculator

help to promote the establishment of demand and supply equilibrium and stability

of prices. But speculation often degenerates in to gambling when operations are

undertaken blindly and ignorantly by speculators who hope to reap rich rewards

from their operations. As a result of excessive and reckless speculations, there is

considerable risk of loss to the genuine investors. The speculators themselves may

actually risk little since they operate largely on borrowed capital and without

capital at all.

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Manipulative speculation is carried on in our stock exchanges by main methods

which are generally condemned and which are not permitted either by law or by

the rules governing the practices of the stock exchanges. Some of the important

manipulative practices are option, wash, sales, touting, inside collusion,

manipulation of fundamentals, corners etc. The purpose of manipulative or

speculation is to push up the price of any particular share or group of shares

through artificially pushing up the demand for them.

Wash sales for example are not genuine transactions at all but are transactions by

the manipulators with themselves (that is buying and selling of shares from and

themselves) with the purpose of impressing the gullible investing public about the

great demand and high prices of the stocks and shares.

Option is a method by which the speculator prospects him from risk and loss, but

in process he may manipulate the market. Inside collusion refers to the collusion

between the manipulators and members of stock exchange with the purpose of

adopting certain practices that are detrimental to the interests of their own

customers. This is the most common problem in the India.

Manipulation of fundamentals refers to the illegal practices of directors and top

officials of companies to manipulate the earnings, dividends and the assets or their

companies in such a manner as to cause the great fluctuations in the price of their

shares.

112 of 163
Comers refer to the buying of a major portion or the entire amount of the shares of

a company by one party, with the purpose of pushing up the price of the share

later or to get control over the management of a company. The classic case was

the attempt of NRI Swaraj Paul’s cornering of the shares of Escorts and DCM in

the eighties.

In all the above instances the speculators manipulate the market by unfair

practices, spread false rumours and often give wrong and misleading information

so as to make profit for themselves at the expense of the general investors.

Illegitimate speculation has another bad effect namely it is infectious. In certain

periods as during 1991-92 when stocks and shares are rising in prices either in a

natural way or through manipulation by brokers, the spirit of get rich quick enters

into every man’s head. As a result accepting the cool-headed, well informed

experienced and expert dealers in the stock market who are qualified to gauge the

market influences, a multitude of ignorant and excitable persons, alternatively

reckless and weak and afraid begin to speculate. These speculators being ignorant

of the Market conditions are ultimate losers both individually and as a class. This

has been the position in India in 1991-92 ran away boom and the inevitable crash.

Again happened in 2000-2001.

Rash speculation ultimately resulting in crash of the market leads to heavy losses

to insurance companies, mutual funds and other financial institutions that invest a

large part of their funds in securities.

Page 113 of 163

Manipulative speculation in stocks and shares often tends to increase the intensity

of industrial fluctuations and ultimately may result in business and industrial

crisis. The classic example was the Wall Street crash resulting in sudden decline

in the prices of shares, which ultimately lead to the great depression of 1929-33.

Wall Street is the location of the New York stock exchange.

But certain degree of speculation is necessary to have adequate interest of the

investor community. But there is no doubt about the fact that legal methods of

speculation whether in the Cash or the derivative segment is essential for the

growth of the capital market.

Presently as the Badla system has been abolished it has been replaced with

Futures and Options. This has changed the rules of the game as regards the old

fashioned speculation in the Indian Capital Market.

It has now become much more organised, transparent and most importantly all

these Derivative products has very strict and well defined Risk Management

measures in place.

These risk management measures are followed very strictly by the Exchanges and

they protect the investor from the colossal losses they used to suffer during the old

days old speculation.

The Speculation is now based on scientific tools that has been followed in the

International markets. The speculations are more towards arbitrage opportunities

114 of n
 that exists based on the obvious price differential between the Cash and the

Derivative Segment. For example say the price of a particular stock is Rs 100 in

the Cash Segment and Rs 110 on the Derivative Segment, then the speculator will

buy on the Cash Segment and sell on the Derivative segment, thus taking

advantage and making profits on the same.

Presently speculation is more towards arbitrage opportunities and hedging

transactions which is also true in the global markets. It has made speculation a

more scientific game and has also aided in the development and growth of the

Indian Capital market. So speculation plays an important role in determining the

price movements.

5.4.2 Political things which affected the Sensex:

Whenever political earthquakes hit Delhi. The after shocks are felt in Mumbai, the

countries financial capital stock markets are wary of turmoil, and political stability

hits them hard. Over the past six years as the country entered the era of coalition

politics the threat of a Government’s fall surface with alarming regularity.

It all began in 1994 when the P. V. Narasimha Rao Govt, faced a no confidence

motion in the Loksabha. Since then every subsequent Govt, in Delhi has lunched

from crisis to crisis. In 1996b the ascent of Dava Gowda Govt, to power and its

fall next year then rise and fall of the I. K. Gujral Govt, the coming to power of

Vajpayee Govt, in 1998 and the troubled relationship with AIDMAK until 1999 -

115 of 163
 and the Mamata Banerjee resignation have all found their reflection in the stock

markets.

While the political drama plays out in Delhi, bulls and bears slug it out in

Mumbai. The patterns are interestingly similar. While economics and politics

have always been intricately linked. The relationship has come much closer in the

past 10 years. Spread of the equity cult and dawning of the information age have

also contributed to the increasing convergence between Markets and Politics. This

is particularly because the stakes are much higher now than they ever were.

Market reaction to any political development is very sharp these days due to news

travelling faster.

We discussed the four major political upheavals in the past 16 years and analysed

how the markets behaved after the crisis. We find that after a volatile movement

the sensex has moved upward. This could be due to various reasons, while it can

be said that political troubles lead to a shake out and hence a technical correction.

It also appears that the markets do not favour any political party.

5.4.3 Technical Factors

There are certain statistical methods, which indicate the direction of price

fluctuations and help to understand the future trends. One very important thing to

note here is that technical factor only takes prices into consideration and nothing

else. The important statistical tools and techniques of forecasting are as follows:

(a) Extrapolation

Page 116 of 163

 (b) Time series Analysis - Moving Average

(c) Regression Analysis

(d) Sensitivity Analysis

(e) Index numbers

(f) Exponential smoothing

(g) Candle Stick Theory

(h) Random Theory

Common sense technique is another popular technique of price forecasting that

requires the judgment of the decision-maker. When accurate quantitative

information is not available self-judgement plays an important role in forecasting.

The prices are extremely sensitive and susceptible to situational changes. The law

of demand and supply generally governs the price of any security. It is an

important fact that when the supply of any security is limited the price of that

security increases.

Forecasting of fluctuation in share prices is a difficult task because of the

uncertainty regarding prevailing conditions in the market and varied expectation

of the persons dealing in the market.

Technical factors like the Outstanding positions in a particular stock on a

particular date play an important role in. the movement of the prices. The technical

factors show as to whether the stock is in a over bought position or over sold

position. This can be tracked by means of charting. The overall positions i.e. over

Page 117 of 163

bought or over sold or consolidation position plays an important role in

determining the stock prices. The technical charts indicates as to which way the

price will move depending on its market technicals.

The moving average data for the previous periods which may range between 5

days to 6 months on the prices, quantity traded during this period is part of the

technical analyis about the price movement.

The Candlestick theory in the techical analysis also plays an important role in the

price forecasting.

The higher tops and higher buttoms is one of the technical factor which shows that

the stock is headed for further rise.

The Technical chart does not take the fundamentals of the Company into

consideration.

As it takes into consideration only prices, there is a famous saying about

technicals as regards stock prices, which is ‘Price discounts everything”.

All these technical factors play an important role as regards price movements of

the stocks. At times, the markets also go against the technicals, but on most of the

times they usually follow the overall technical dynamics that exists.

But it is not alone the technical factors, which determines the volatility or the

stock price movements, but can be said to be one of the primary factors affecting

the market.
Page 118 of 163
5.4.4 Liquidity Factors:

Liquidity plays a dominant role in determining the prices of stocks and also to the

volatility of the market. It has been typically seen that lower interest rates makes

the investment in the Equity Market more attractive. As the interest rates drops,

the investment in equities looks more attractive. This is due to the fact that

typically the returns associated with Equity are much higher than in the fixed rate

bonds and debentures.

In the present Indian context also as the interest rates dropped significantly to

about 8-9%, the equity market revived. The retail as well as the institutional

investors found the equity market more attractive at these levels of interest.

The liquidity driven markets takes the prices of the stocks to higher levels as more

money chases the same stocks. It then typically becomes a position of demand and

supply as the money (liquidity).

As the funds gets diverted to the Equity market from the fixed income market, the

prices of stocks improves immediately.

The liquidity comes from all segments like Fils, Mutual Funds, Financial

Institutions as well as retail investors

In times of reverse flows from the equity market by way of transfer to the Bonds

and debentures, redemption of mutual funds, liquidation by Fils, the prices and

the market levels drops.

Page 119 of 163

 At all times of a boom in the Stock market, it is always accompanied by higher

levels of liquidity in the form of increased inflows and investments of Fils,

Institution and retail investors also.

5.4.5 Others Factors Affecting prices on Stock Markets:

There are also other varieties of factors affecting the prices of secirities. The

conditions prevailing and expectation have a direct relationship with the factors

responsible for such fluctuations in prices. Some of the important factors are given

below:

(1) Rate of interest in the Market: Rate of interest has a powerful influence on

security prices. Purchase or sale of securities is directly linked with the

increase or decrease in interest rate. A decline in interest rate tends to increase

purchasing power, which results in the increase in prices of securities.

(2) Foreign Exchange Currency fluctuations: Share prices are also linked with

foreign currency exchange rates. Companies having larger imported

components in the final product with the increase or decrease in the prices of

these components are liable for a decrease in foreign currency rates.

(3) Political Situations: The political developments both at home and abroad

directly affect share prices. Uncertain political situation creates uncertainty in

the stock market. Share prices are also adversely affected during war, which

completely a political phenomenon.

(4) Trade Cycles: The trade and industry reveal a tendency of cyclical variations

that are termed trade cycles or Booms and slumps. The cyclical changes affect

share prices to a considerable extent. During boom period the prices of shares

tend to move up whereas during slumps the tendency to dullness prevail in the

market.

(5) Government Policies: Govt, plays a dominant role in all aspects of the life of

a nation. The Govt, governs and regulates the activities of the security market.

The ideology and policies of the Govt, have direct bearing on the prices that

rule on the stock exchanges. Govt, policies regarding taxes, price control,

nationalization or privatization introduction of any prohibition or protection to

any industry has direct relationship with the increase or decrease in prices.

(6) Intrinsic situation of a company: The major cause of share price variation is

the intrinsic position of a company i.e. results of company’s operation,

modernization, expansion, diversification, absorption, mergers and worker mgt

relations.

(7) Market psychology and whims of the operators; Market psychology plays

an important role in determining market price of any share. If the leading

operators favour at one time one scrip it may result in the increase of the price

of that scrip. ACC and Apollo tyres were the fevoured shares of share dalal

Harshad Mehta at one time. There may or may not be any assignable reason

for the particular choice.

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(8) Changes in the regulatory provisions of the Stock Exchanges: Changes in

the regulatory provisions regarding stock exchanges may also affect the share

prices. For example changes in margin requirement is a major factor among

various regulatory provisions and has its effect on prices in the stock

exchange. Share prices also increase when settlement period is sifted from one

date to another.

(9) Inter relationship between Stock Exchanges: Stock Exchanges all over the

world is inter related and inter dependent. If the price at one stock exchange

increases it may influence the price at other exchanges also.

(10) Floatation of New Issues: If an existing company floats new issue of capital

then its capital base increases which results in the decease in the price of the

share. The company prevents such loss to the existing shareholders by giving

them the right at lower prices.

(11) Effect of Monsoon: The uncertainty of monsoon is a principal factor in India

that influences security prices. Better Monsoon results increase in the

agricultural production which is directly related with the industrial output and

hence with security prices.

(12) Insider Trading: According to the SEBI (Insider Trading) Regulations

1992, Insider means any person who is or was connected with the company or

is deemed to have been connected with the company and who is reasonable

expected to have access by virtue of such connection to unpublished price

sensitive information in respect of securities of the company. Now it is widely

Page 122 of 163
 believed that the trading by such insider significantly cause fluctuations in

prices of the securities.

(13) Budgetary Factors: In developing countries like India the Govt, budgets

have a very significant influence over the economy. The Budget is an estimate

of the Govt, expenditure and revenue for the coming financial year. The tax

provisions and relaxations given in the budget have been found to have a

direct relationship with the stock market Trends.

5.5 Conclusion

There are many factors, which contribute to the volatility and the price movements.

Speculation, Technical factors, political factors, liquidity factor and a host of other

causes have a direct impact on the price movements of the stocks.

Fundamentals of the company like profitability, growth, management quality also

plays an important role in determining the prices of the stocks over a sustained period

of time.

Volatility is the key to any stock market and in Indian Capital market also it is the

same. The examples of the leading stocks and how they have fared over time as

regards to the volatility have illustrated this.

Volatility affects the market Capitalisation, the PE Multiples, the Price to Book Value

ratios. Liquidity also plays an important role in determining the price levels.

Volatility and price levels are therefore affected by host of other factors other than

fundamentals. _______
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REFERENCE

• Economic Times

• Chartered Financial Analyst

• National Stock Exchange website (www.nseindia.com)

• State of Capital Market published by SEBI

• Capital Market Development by N.J Jhaveri

• Essential of Managerial Finance by J.K Weston & E.F Brigham

• Theory of Finance by E.F Fama & M.H Miller

• Financial Statement Analysis : A New Approach by B Lev

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