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Analysis of stock market fluctuations

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Analysis of stock market fluctuations

  1. 1. BUSINESS RESEARCH METHODS RESARCH REPORT ON ANALYSIS OF STOCK MARKET FLUCTUATIONS SUBMITTED TO: DR. VIBHAVA SRIVASTAVA MARKETING AREA SUBMITTED BY: ADITYA KAPOOR (2012020) AMIT GUPTA (2012037) GROUP - 2 SECTION - A PGDM- 2012-14
  2. 2. ANALYSIS OF STOCK MARKET FLUCTUATIONS SUMMARY: The report will tell the behavior of stock prices within a specific period of time and what factors influence the stock prices. The stock prices according to our report particularly are influenced by increase/decrease in internal factors such as sales and profitability and by external factors such as its relationship between stock market behavior and cycle period of economy (boom or recession). The weight age of each of these factors is industry specific. PROBLEM STATEMENT: Sometimes we observe that whenever any monetary or fiscal decision or when any company declares its result like how much they earn profit in the particular financial year or when they announce any expansionary project, capital market got affected. So, we want to find out whether the fluctuations in stock markets are random or follow a cause and effect relationship with all these decisions. Hence, we have derived the hypothesis, and they are:  H0: That all the variables (sales, profitability and economic indicators) will affect the stock return, and stock fluctuations behavior can be determined by these variables.  H1: Stock market behavior will be determined by the technical analysis. BENEFITS OF THE STUDY: Broadly we have classified the benefits research into various sub groups:  As an investor: 1. An investor will be able to predict returns and take decisions according. 2. Investor can earn higher returns.  As a Student: Student can learn about various research methods that are used to determine the stock market. RESEARCH DESIGN: We have followed the exploratory research approach and our research is typically based on the secondary data plus on a small focused group survey by targeting those persons who invests in the market frequently, hence we have taken a sample size of 20 persons. Through the survey we are to predict the investor behavior that how they invests in the market and what are the factors which they see In this research we are analyzing the stock market movement by doing fundamental research which includes the variables like beta value, profitability and sales of the company and economic indicators like GDP, inflation as well. With all these variables we have tried to predict the dependency of the variables among each other. As exploratory research allows us to manipulate the discoveries due to less stringent methodological restrictions, hence we have used the data to do the research on our hypothesis that we have made. We are focusing on the research objective that if any normal investor invests in the market by analyzing all these factors then is (s)he will be able to earn a good amount on the stock market provided that all the factors that we have taken are dependent or not. So if all the factors are dependent then we can infer that our objective is workable and if not then we have to simply shift towards the technical analysis (observing the trend that how much shares are being purchased and sold or how much money is invested on daily basis) of the market which is beyond our research scope because it requires very typical and heavy calculations on the daily basis. 2 | GROUP – 2 SECTION – A PGDM -2012-14
  3. 3. ANALYSIS OF STOCK MARKET FLUCTUATIONS QUESTIONNAIRE ANALYSIS: A focus group questionnaire was filled by 20 respondents i.e. by those who invest frequently in stock market and also look at some factors while investing in stock. Following were the questions asked to them: 1. How frequently do you invest in stock market in a year? a. Daily b. Weekly c. Fortnightly d. Monthly e. Quarterly f. Yearly 2. How much do you invest in a year (in ₹)? a. 0-25, 000 b. 25, 000-50, 000 c. 50,000 -75, 000 d. 75, 000 & above 3. What factors you observe while investing in a company stock? a. Fundamentals i. Sales or Quarterly Results ii. Profitability iii. P/E Ratio iv. Company type (Blue Chip or White chip) v. Business Trend vi. News 1. Economic News 2. Stock Specific News b. Technical Following results were obtained: 1. How frequently do you invest in stock market in a year? 10 5 8 3 0 3 | GROUP – 2 SECTION – A 4 0 0 PGDM -2012-14
  4. 4. ANALYSIS OF STOCK MARKET FLUCTUATIONS 2. How much do you invest in a year (in ₹)? Frenquency Rs0-25000 Rs25000-50000 5% 10% Rs75000 ABOVE 40% Rs5000075000 45% 3. What factors you observe while investing in a company stock? 20 18 15 10 14 5 12 11 10 8 5 Series1 0 DATA ANALYSIS: 1. STATE BANK OF INDIA: STATE BANK OF INDIA RELATION BETWEEN STOCK RETURN AND CORRELATION REGRESSION SIGNIFICANCE F SALES 0.766725515 0.587868015 0.130413348 PROFITABILITY 0.661256299 0.437259894 0.224253153 ECONOMIC INDICATORS 0.865156419 0.74849563 0.05822293 ALL THREE VARIABLES 0.916442587 0.839867014 0.49556236 After all the calculations, we observe that there is high correlation and good dependency between stock return and economic indicators and this argument is also closely supported by the significance F value(1%).  Considering the relation between sales and return correlation is high and dependency is moderate but significance value of F shows the amount of errors the data set possess and same is the case with profitability and return. In order to solve or rectify rather this problem we clubbed all the variables. 4 | GROUP – 2 SECTION – A PGDM -2012-14
  5. 5. ANALYSIS OF STOCK MARKET FLUCTUATIONS  Considering the relation between the stock return and economic indicators and we found that the significance level is somewhat supporting our result which helps in analysing the behaviour of stock fluctuations. To support this argument graph 1.1 depicts the same behaviour i.e. any monetary or fiscal measures taken by the govt. the stock markets move accordingly. Still the data have very small percentage of errors. RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURNS 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 economic indicators stock return 2012 2011 2010 2009 2008 0.0334375 0.042875 0.04325 0.02575 0.040275 -0.39893 0.748289 0.252093 -0.41373 0.485794 Graph 1.1: RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURNS So, to remove this error we clubbed all the variables with each other.  After clubbing all the dependent variables (sales, profitability and economic indicators) and find the correlation between clubbed variables and stock return we find the problem of multi co-linearity even though there is a high correlation and dependency among themselves. Graph 1.2 shows the same i.e. because of problem of multi co-linearity the behaviour of both the lines is somewhat different. So, it is hard to determine the stock market behaviour with these variables. RELATION BETWEEN RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS 1 0.5 0 -0.5 RETURN 2012 2011 2010 2009 2008 -0.39893 0.748289 0.252093 -0.41373 0.485794 SALES, PROFITABLITY & ECO. 0.696229868 -0.116466523 0.07643367 0.457001297 0.581982196 INDICATOR GRAPH 1.2: RELATION BETWEEN RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS 5 | GROUP – 2 SECTION – A PGDM -2012-14
  6. 6. ANALYSIS OF STOCK MARKET FLUCTUATIONS  So, for the banking sector an investor can somewhat rely on the economic indicator. And other than that an investor can also go for the other factors for the stock fluctuations like price to earnings ratio or otherwise investor has to go for the technical analysis. 2. MARUTI SUZUKI INDIA LIMITED: RELATION BETWEEN STOCK RETURN AND SALES PROFITABILITY ECONOMIC INDICATORS ALL THREE VARIABLES   MARUTI SUZUKI CORRELATION REGRESSION SIGNIFICANCE F 0.463136819 0.214495713 0.432133082 0.841827236 0.708673096 0.073696915 0.954913767 0.911860303 0.011414074 0.998657544 0.99731689 0.065922709 Initially if an investor got influenced with the sales and profitability results of the company then it might not get the accurate picture about the stock movement because for sales correlation and dependency with the stock return are low and high and weak and moderate respectively. But if we analyse the significance F value; it shows the high percentage errors in the sales data and very low error in the profitability data but logically it should be the same because both sales and profitability are interrelated with each other. So, it is not showing the clear picture. Considering the economic variable with stock return; the correlation is very strong and dependency between them is also very high and significance value of F test also RELATION BETWEEN ECONOMIC INDICATOR AND STOCK RETURN 2 1.5 1 0.5 0 -0.5 -1 ECONOMIC INDICATOR STOCK RETURN 2012 2011 2010 2009 2008 0.0334375 0.042875 0.04325 0.02575 0.040275 0.62663 -0.34683 -0.0859 1.847905 -0.47077 GRAPH 2.1: RELATION BETWEEN ECONOMIC INDICATOR AND STOCK RETURN supports our argument as there is almost no error in the data set. But after observing the graph it is clear that economic indicators like GDP and inflation that we had considered are not enough to substantiate the stock fluctuations (refer graph 2.1) there is a possibility of other economic factors like any measures taken by the govt. for the stock specific or sector (automobile) specific might be there which is influencing the stock prices in the market. For that we have combined all the variables to find the clear picture.  After clubbing all the variables, there is a strong relation and high dependency among others and the same is supported by the F value. So, our assumption in above point is 6 | GROUP – 2 SECTION – A PGDM -2012-14
  7. 7. ANALYSIS OF STOCK MARKET FLUCTUATIONS RELATION BETWEEN STOCK RETURN AND SALES, ECONOMIC INDICATORS AND PROFITABILITY 2 1.5 1 0.5 0 -0.5 -1 2012 2011 2010 2009 2008 SALES, RETURN AND -0.258914554 ECONOMIC INDICATORS 0.020945 0.15734397 -0.233295 0.2033916 STOCK RETURN -0.34683 -0.0859 1.847905 -0.47077 0.62663 GRAPH 2.2: RELATION BETWEEN STOCK RETURN AND SALES, ECONOMIC INDICATORS AND PROFITABILITY almost founds to be true and the same is being supported by the graph 2.2 that all the variables and the other variables results in the fluctuations of this stock and behaviour can be analysed about the market fluctuations can be determined.  So, for an investor to earn good profit through this stock they must look towards the economic indicators with other indicators like P/E ratio and beta values of the stock as well. 3. DR. REDDY’s: DR. REDDY's RELATION BETWEEN STOCK RETURN AND CORRELATION REGRESSION SIGNIFICANCE F SALES 0.472567434 0.22331998 0.421520897 PROFITABILITY 0.536678712 0.28802404 0.35106906 ECONOMIC INDICATORS 0.801718309 0.642752248 0.102777858 ALL THREE VARIABLES 0.978170001 0.956816551 0.262670343   The relation between sales and return is moderate and dependency between them is low and F value shows the good amount of errors in the data set or in other words very noisy data, same is the case with profitability. So it is hard to depict the true behaviour of the stock with these two factors. For this to overcome we have to increase the data set range from five years to large number in order to clear the picture or we to choose other factor. Relation between economic indicators and return is strong with moderate dependency and significance F value shows a little amount of noisy data which can be rectified if 7 | GROUP – 2 SECTION – A PGDM -2012-14
  8. 8. ANALYSIS OF STOCK MARKET FLUCTUATIONS RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 2012 ECONOMIC INDICATORS 2010 2009 2008 0.1724 STOCK RETURN 2011 -0.052 0.3313 1.4375 -0.3554 0.0334375 0.042875 0.04325 0.02575 0.040275 GRAPH 3.1: RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN  increase our data set range. But after observing the graph 3.1 the result is something else because economic indicators have no impact on stock returns which means that there is some other factor which is influencing the stock behaviour. It might be the price to earnings ratio or beta value of the stock or something else. The measures taken by the govt. are not affecting the stock market; either there is a possibility that the measures are not sector and stock specific. For this to determine we clubbed all the variables. After clubbing we found the high dependency and strong correlation among all the variables but the data set is very noisy as there is a problem of multi co-linearity. So, RELATION BETWEEN STOCK RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS 2 1.5 1 0.5 0 -0.5 -1 STOCK RETURN 2012 2011 2010 2009 2008 0.1724 -0.052 0.3313 1.4375 -0.3554 0.143804 0.576519 0.25502 -0.584922 ECO. INDICATOR, SALES & 0.12690457 PROFITABILITY GRAPH 3.2: RELATION BETWEEN STOCK RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS 8 | GROUP – 2 SECTION – A PGDM -2012-14
  9. 9. ANALYSIS OF STOCK MARKET FLUCTUATIONS If we increase the data set range then that problem can be rectified. From the graph 3.2 it is clear that all the variables are highly dependent on the stock return and they are moving in a same way. And also there is possibility that stock is getting influenced by some other factors because in the range of five years of data; data set is very noisy so there might be a possibility that some other factors or indicators are affecting the stock. So, investors have to closely observe all the factors in order to gain profit from this stock. 4. LARSEN AND TUOBRO: RELATION BETWEENSTOCK RETURN AND SALES PROFITABILITY ECONOMIC INDICATORS ALL THREE VARIABLES   L&T CORRELATION 0.014241594 0.299605326 0.83994028 0.996363434 REGRESSION SIGNIFICANCE F 0.000202823 0.981867652 0.089763351 0.624317065 0.705499673 0.07499721 0.992740093 0.108355081 As this is the stock of capital goods, so sales and profitability will not affect the stock return anyhow the capital goods which are producing by the industry are always in demand. Their demand varies only when govt. takes any monetary or fiscal measures for the further expansion or to boost the industrial sector of the company. The same has been reflected by the data set that weak correlation and very low dependency of the sales and profitability with the stock return. And the same has been supported by the significance F value which shows the huge amount of percentage errors in the data. On finding the relation between the economic indicators and return we find that relation is good and dependency is moderate which means that there is a relation between them which is affecting the stock fluctuation in the market but graph 4.1 says RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN 1.5 1 0.5 0 -0.5 -1 2012 2011 2010 2009 2008 STOCK RETURN 0.630653 -0.48989 0.181623 1.057856 -0.61843 ECONOMIC INDICATORS 0.0334375 0.042875 0.04325 0.02575 0.040275 .GRAPH 4.1: RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN something else. It says that economic indicators alone are not affecting the stock there is a measure taken by the govt. for this sector which is affecting the stock; which we tried to find by clubbing all the variables. 9 | GROUP – 2 SECTION – A PGDM -2012-14
  10. 10. ANALYSIS OF STOCK MARKET FLUCTUATIONS  After clubbing we find that correlation is very strong and dependency of all the variables are very high, and the data set are having somewhat low noise or problem of multi co-linearity is there which can be rectified by increasing the data set range. RELATION BETWEEN STOCK RETURN & ECO. INDICATOR, SALES AND PROFITABILITY 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 -0.6 -0.8 2012 2011 2010 2009 2008 0.630653 -0.48989 0.181623 1.057856 -0.61843 ECO. INDICATORS, SALES AND 0.2146662 PROFITABILITY -0.006575 0.322234 0.716977 0.6928262 STOCK RETURN GRAPH 4.2: RELATION BETWEEN STOCK RETURN & ECO. INDICATOR, SALES AND PROFITABILITY By closely observing the graph 4.2 we find that our argument is true. The stock is behaving in the same way as the variables are behaving. Hence for investors to invest in the capital goods firms they must see those factors which are affected directly by the measures taken by the govt. KEY FINDINGS: From the above research we can conclude that:  Sales and profitability though they are positively related to the return to stock but have high level of significance of 20-50%, which means high number of errors. This cannot be validated, so they are not considered. To remove errors this we can take longer range of data.  The economic indicators- GDP and Inflation measure the overall growth and money supply of an economy. These show positive relation with stock returns and have only 1% level of significance.  After clubbing all the data of sales, profitability and economic indicators we conclude that although these are highly related with stock returns but have larger significance value i.e. from 6%-50%. So these all data cannot be validated.  There are some other factors such return of stock with relation to market return and P/E ratio etc. that also affect the stock price. RECOMMENDATIONS: Our study suggests following recommendations:  As an investor in stocks one should not go by the figures of increase or decrease in sales and profitability because they have a chance that they will not affect the return of stock. 10 | GROUP – 2 SECTION – A PGDM -2012-14
  11. 11. ANALYSIS OF STOCK MARKET FLUCTUATIONS  While investing one should always look for economic indicators such as GDP and Inflation because these figures directly affect the stock returns. An increase in these factors will also increase the stock returns. So, as an investor one should see that whether the GDP growing or not and inflation is high/low. REFERENCES:  For all the figures in the tables refer spread sheet.  Bloomberg terminal for beta values, stock returns  Other online resources for the price to earnings ratio, sales and profitability like o www.moneycontrol.com, o www.bseindia.com o www.money.rediff.com o www.tradingeconomy.com for economic indicators like GDP, inflation.  E-resources like: prowess and Capitaline. 11 | GROUP – 2 SECTION – A PGDM -2012-14

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