"A Study of Relationship Between Stock Liquidity, Volatility of Stock Returns and Stock Price

Before liberalization, Indian economy was tightly controlled and protected by number of measures like licensing system, high tariffs and rates, limited investment in core sectors only. During 1980's, growth of economy was highly unsustainable because of its dependence on borrowings to correct the current account deficit. To reduce the imbalances, the government of India introduced economic policy in 1991 to implement structural reforms. The financial sector at that time was much unstructured and its scope was limited only to bonds, equity, insurance, commodity markets, mutual and pension funds. In order to structure the security market, a regulatory authority named as SEBI (Security Exchange Board of India) was introduced and first electronic exchange National Stock Exchange also set up. The purpose behind this was to regularize investments, mobilization of resources and to give credit. Mark Twain once has divided the people into types: one who has seen the great Indian monument, The Taj Mahal and the second, who have not. The same can be said about investors. There are two types of investors: those who are aware of the investment opportunities available in India and those who are not. A stock market is a place where buyers and sellers of stocks come together, physically or virtually. Participants in the market can be small individuals or large fund managers who can be situated anywhere. Investors place their orders to the professionals of a stock exchange who executes these buying and selling orders. The stocks are listed and traded on stock exchanges. Some exchanges are physically located, based on open outcry system where transactions are carried out on trading floor. The other exchanges are virtual exchanges whereas a network of computers is composed to do the transactions electronically. The whole system is order-driven, the order placed by an investor is automatically matched with the best limit order. This system provides more transparency as it shows all buy and sell orders. The Indian stock market mainly functions on two major stock exchanges, the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). In terms of market capitalization, BSE and NSE have a place in top five stock exchanges of developing economies of the world.