ASSIGNMENT 2

PROJECT TOPIC IN FINANCE

Date : 25 /08 /2011

Submitted By Anu Jacob PR10MS105 FINANCE A

Topic :

A study on the factors influencing the share market

INTRODUCTION:
Stock market is something where you can never foretell what is going to happen in the market. You might get huge gain or incur losses when the stock market crashes. There are many factors affecting share prices. It is very hard to say just one or two factors affect the share prices. Share prices are the

most important indicator readily available to the investors for theirdecision to invest or not in a particular share. Investigations of share price changes appear to yield evidence that changes in fundamental variable(s) should jointly bring about changes in share prices both in developed and emerging markets. However, the actual fundamental factors found to be relevant may vary from market to market.

Stock trading is driven by psychology just as much as it is by business fundamentals,believe it or not. Fear and greed are the two of the strongest human emotions that affect the market. One of the main business factors in determining a stocks price is a companys earnings,including the current earnings and estimated future earnings. News from the company and other national and world events also plays a large role in the direction of the stock market. Some examples of this are oil prices.inflation.and terrorist attacks.

Every analyst and trader has a different perception of what that stock price should be now and where it might be in the future,and trading decisions are made accordingly. Many traders rely on experts opinions about companies and future stock prices. But nobody can predict what will happen in the future. They can, however make educated guesses based on past performances and future prospectus for the companies and industries.

STATEMENT OF THE PROBLEM

Stock market prices are affected by business fundamentals, company and world events, human psychology, and much more. Some other factors that affect share prices are Demand and Supply This is the first factor that affects share prices. When you get to see that more people are buying stocks, then there is an increase in the price of that particular stock. On the other hand price of stock falls when more people are selling their stocks. So it is very difficult to predict the Indian stock market. This is the main reason why you need to get in touch with a good stock market consultant. There is consultancy for you which can help you a lot on choosing the right stocks for you. Market cap It is a very big mistake when you try to guess a companys worth from the price of a stock. You should know that the more important is the market capitalization of the particular company. This helps to determine the worth of a company. So market cap serves as an important use to determine share prices. Earning per share Now when it comes to the term, earning per share, it means the profit that a particular company has made per share and that too on the last quarter. If you need to know the health of the company then this is the most important factor. Whats more earning per share also influences the buying tendency in the market that results in the increase of the particular stock price. This is the reason why it is very important for every public company to bring out the quarterly report. So when you wish to make a profitable investment, then the best thing for you would be to keep a good watch on the quarterly reports of different companies. This is very important before you wish to invest your hard earned money in the share market.

Impact of news News is another factor that affects the share price. When there is positive news about a particular stock or company, people try to invest all their money in that particular stock or market. This leads to increase in the interest of buying the stock. But there are many circumstances where news could also bring a negative effect where it could ruin the prospect of the particular stock. So it is very important to know the overall news of a stock or company where you can invest your money so that it grows within a very short period of time. There are many things that you need to consider when you go for investing your hard earned money in the stock market. You should never be in a haste to invest your money in the stock market. You should always get in touch with a good stock market consultancy where it can give you some share tips. They are the one who can give you advice where to invest your money and where not to. They know to distinguish the good stock from the bad ones. So, you have come to know about the factors affecting share prices. Remember that it is very important to make a good market research before investing in any stock or company.There are a number of things that can affect an investor's entry ( buy) into or exit ( sell) out of a given stock and/or sector. Depending on the investor and his or her goals and investing time frame, the importance of timing the entry will differ. Obviously, the shorter the time frame the more important the entry; specific entries matter little to long-term (five years or more) investors. All investors should be aware of some of the more common market moving influences that can affect a stock's price, so they can make better entries and catch an extra percent or two in return. Let's take a look at eight items that can materially affect the average day's trading.

Overseas Market /Economic Action

The New York Stock Exchange opens for business at 9:30 a.m. EST each day. However, prior to the opening trade on the NYSE, equity markets in Asia and Europe have already (or almost) finished their trading day. The point is, if certain stocks and/or sectors have had a particularly good or bad day in those markets, the sentiment could have an impact on trading here in the U.S. Special Offer: When a bear market comes to call, make money in put options. Although it can be

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For example, a pessimistic outlook for technology companies in Asia or pharmaceutical companies in Europe could easily spill over into U.S. trading and cause American technology and pharmaceutical stocks to take a nosedive. This in turn has a major adverse impact on all of the major indexes. If you see major negative activity in a foreign market that affects your sector, it might be best to wait until the dust settles before you enter the position. Economic Data If there is talk that China may revalue its currency (the yuan), then it may cause shares of exporters to China to trade higher. (The logic behind this is that Chinese companies and individuals will be able to affordmoreU.S.-madeproductswithahigheryuan.)

Incidentally, interest rate changes can also cause money to flow into and/or out of certain markets. For example, as interest rates in the U.K. rise, investors in that market may flee for betteropportunities.Often,U.S.stockswillreapthebenefit. In choosing when to invest, you should be aware of any economic news that is or will be coming out around the time you go to enter your position. If a highly anticipated economic release is set to come out that may lead to market volatility, it might be best to wait for its release instead of jumpinginbeforehand.

Futures Data Although an individual might be eager to buy or sell stock "at the open" at a favorable price, futures data will give the individual a better idea of whether that will actually be possible. Index futures cover the major market indexes. They start trading before the stock market and are a very good indicator of what the stock market opening will look like. The reason for this is that index futures prices are closely linked with the actual level of the Dow Jones industrial average (DJIA). In short, investors should check to see if futures contracts are trading higher or lower in premarket trading. This will give them a better feel for where the index they are tracking might be

headed "after the open." You will usually find CNBC or other market outlets talking about the movementofDJIAorS&P500futuresbeforetheyopen.

A lot of buying and/or selling typically occurs within the first hour of the trading day. The opening hour of trading is basically the first time that most market participants have to enter or exit the stock, which can easily produce higher than average trading volume. These market participants are reacting to the myriad news stories that came out between yesterday's close and today's open, which includes major market news events like economic reports and political changes.

Prior to the open, a handful of bellwether stocks report earnings or disseminate news. This can cause some investors (both retail and institutional) to rotate money in or out of a sector at the firstchancetheyget,creatinmadrushattheopen. There is typically a drop-off in trading (meaning the volume of transaction) at noon, as most of the major news events are out in the market. During this lull, stock prices can often lose some ground. Stock market prices are affected by business fundamentals, company and world events, human psychology, and much more.

Stock trading is driven by psychology just as much as it is by business fundamentals,believe it or not. Fear and greed are the two of the strongest human emotions that affect the market. One of the main business factors in determining a stocks price is a companys earnings,including the current earnings and estimated future earnings. News from the company and other national and world events also plays a large role in the direction of the stock market.

Common mistakes
We are all human and we all make mistakes. But forinvestors those mistakescostmoney.Knowing the mostcommon pitfalls can help you learn from the mistakes ofothers and avoid losing out. For example, following theherd can be a recipe for disaster: Remember whenpeople piled into dotcoms in the late 1990s? Also, don'tpanic on a downturn. Selling out without serious reason will crystallise a loss and you may miss out on arebound. Finally, never chase a quick profit, thinkingyou can time the market this is no different togambling on horses. Investment is a long-term gameand requires planning. Any other approach makes it ahighly risky business. There are many things that you need to consider when you go for investing your hard earned money in the stock market. You should never be in a haste to invest your money in the stock market. You should always get in touch with a good stock market consultancy where it can give you some share tips.All investors should be aware of some of the more common market moving influences that can affect a stock's price, so they can make better entries and catch an extra percent or two in return.

REVIEW OF LITERATURE:

1. Determinants of Equity Prices in the Stock Markets :

The price of a commodity, the economist makes us to believe is determined by the forces of demand and supply in a free economy. The most basicfactors that influence price of equity share are demand and supply factors. If most people start buyingthen prices move up and if people start selling prices go down. Government policies, firms andindustrys performance and potentials have effects on demand behaviour of investors, both in theprimary and secondary markets. The factors affecting the price of an equity share can be viewed fromthe macro and micro economic perspectives. Macro economic factors include politics, generaleconomic conditions - i.e. how the economy is performing, government regulations, etc. Then theremay be other factors like demand and supply conditions which can be influenced by the performanceof the company and, of course, the performance of the company vis-a-vis the industry and the other players in the industry. The forces of demand and supply have direct effect on the stock price while the other indeterminatenumber of firm, industry and country factors influences the demandand supply factors. The effect,positive or negative the other factors apart from the demand and supply leave on stock price are notstatic rather changes

2. Key Fundamental Factors and Long-run Price Changes in An Emerging Market : Share prices are the most important indicator readily available to the investors for theirdecision to invest or not in a particular share. Theories suggest that share price changes isassociated with changes in fundamental variables which are relevant for share valuation likepayoutratio,dividend yield, capital structure, earnings size of the firm and its growth. The link between fundamental factors and share price changes has been extensivelyinvestigated over short horizons but only few studies attempted to model it over lengthyperiods of time. Another relevant factor in affecting the share prices is the capital structure of the firm. Thelevel of debt financing by the firm has impact on the value of firms assets. A high-risk firm (afirm with debt) must generate high return consistent with the investors expected return.Itfollows that with higher debt firm

should have greater rate of change in its share price. Hencecapital structure (DA as debt to asset ratio) changes must be directly related to the share pricevolatility. This study attempts to explain the price changes due to the six theory-suggestedfundamental variables (dividend yield, payout ratio, size of the firm, leverage, earningvolatility and asset growth) in Karachi Stock Exchange during 1981 to 2000 usinannual balance sheet data. This paper identifies the joint- effect multiple factors exerton share prices in the long run. The significant joint factors observed are payout ratio,size, leverage and dividend yields. Together these four factors explain one-fourthvariation in share prices at KSE. The explanatory power of fundamental factors is found to be different in pre- reform (1981 to 1990) and post-reform (1991 to 2000) periods.

3.

Empirical Analysis of Macroeconomic Factors Affecting the StockPrice.

The change in stock prices and trend of change has always been the major concern in the capital market,which affects the stability of the stock market and investors strategies. Analysis of these problems will help us furtherunderstand the general rules of the stock market, in order to provide reference for improving the capitalmarket. The empirical analysis of factors that affect the change in stock price shows that the change in stockprice is mainly affected by the exchange rate, interest rate, macroeconomic prosperity index, consumersconfidence index and corporate goods price index. Except for the five major factors, its also affected by GDP, economic cycle,balance of international trade payments and others, only that their impact is not as huge as that of theprevious five elements. When making relevant strategies, officials need to consider the impact of variousfactors, so that they can make correct and effective measures.

4. Analysis of factors affecting the development of an emergingcapital market: The case of theGhana stock market There has been considerable interest in the development of capital markets in manydeveloping countries in the last twenty years or so, and, evidence of the role of financialmarkets in economic development is well documented. Having seen the important role that capital markets (and forthatmatterstocKmarkets)can play in the economic development of a nation, we turn our attention to the literatureon the factors that may affect the faster development of the capital market of the developing countries. the market infrastructure that will make the securitiesmarket

operate in an efficient, fair and stable manner, is broken into three.ie, institutional infrastructure, regulatory infrastructure and legal infrastructure. Many factors may affect the developmentof capital markets in the developing countries. Identifying the negative factors forrectification will therefore quicken capital market development.

5.

Factors Affecting International Mergers and Acquisitions:

The literature which focuses on FDI as a greenfield investment usually begins withprofit maximization or cost minimization by the firm subject to a productionfunction constraint. The firm will choose its domestic and foreign output levels,along with its input use. Some models focus on FDI as a two-step process, wherebythe firm first decides whether to establish a foreign presence, and then decides theoptimal output level for the foreign subsidiary. The most important metric of financial capacity for the acquiringfirm is often its stock price because M/As are often accomplished through issuanceof stock by the acquiring firm. The greater the capitalization of the acquiring firm,the greater capacity they have for purchasing other firms.

6. Macroeconomic Factors, the APT and theIstanbul Stock Market.

Chen, Roll and Ross have market return, consumption and oil prices in the period of Jan 1953Nov 1984. They found thatseveral of these economic variables to be significant in explaining expected stock return during thetested period. They note that industrial production, changes in risk premium, twists in the yield curve,measure of unanticipated inflation of changes in expected inflation during periods when these variablesare highly volatile, are significant explaining expected returns. They found that consumption, oil pricesand market index are not priced by the financial market. They conclude that stock returns are exposedto systematic economic news of that the news can be measured as innovations in state variables whose identification can be accomplished through simple and intuitive financial theory.

7. Empirical Study on the Main Factors Affecting Price-Earning Ratioof Listed Companies in China The theoretical calculation model for price-earning ratio (PE) is deduced through transformingthe dividend discount model so as to find out the main factors affecting priceearning ratio in theory.Stocks of Shanghai Stock Exchange (SSE) 180 index are selected as the sample, and empirical study onthe main factors affecting price-earning ratio is carried out based on the panel data during the 2002-2005periods with variable intercept model. The possible reason of theoretical deviations from analysis resultsis explained. Key words : Price-earning ratio, Variable intercept model, SSE 180 index

8. Factors Affecting theTrend Toward Internationalization of the Securities Markets

It provides empirical evidencofthenatureandextentoftheinternationalization of securities markets and aframework for understanding the economic,institutional andregulatory factors which are shaping the process of internationalization. there is a review of regulatorytrends which are influencing the international capital formationprocess and an in-depth examination of the international bondand equity markets. Finally, there is an analysis of portfolioinvestment flows and the impact of internationalization on theU.S. securities markets.The worlds securities markets play a much larger role ininternational capital formation than they did just a few years ago. This trend has manifested itself in a number of distinctways. In the 1980s there has been an explosive growth in bonds issued internationally.

9. Relationship between Macroeconomic Variablesand Stock Market Indices: Cointegratio Evidence from Stock Exchange of Singapores All-S Sector Indices. Emerging stock markets have been identified as being at least partiallysegmented from global capital markets. As a consequence, it has been arguedthat local risk factors rather thanworld risk factors are the primary sourceof equity return variation in these markets. Theliterature examining the relation of macroeconomic variables onindividual stock market indices isscarce.

10.

The effects of macroeconomicfactors on stock returns: Istanbul Stock Market:

In this they tested a set of economic variables to explain the US stock marketreturns. They examined the influence of macroeconomic variables on stock returns by testing seven macroeconomic variables: namely, term structure of interest rate,industrial production, risk premium, inflation, market return, and consumption and oilprices between 1953 and November 1984. They found several of these economicvariables to be significant in explaining expected stock return during the test period forwhich the factors were formed. They note that industrial production, changes in rispremium, twist in the yield curve, and measure of unanticipated inflation (of changes inexpected inflation during periods when these variables are highly volatile) aresignificant in explaining the expected returns.

All investors should be aware of some of the more common market moving influences that can affect a stock's price, so they can make better entries and catch an extra percent or two in return.