Limitations of Indian Stock Market Predictions

The stock market in India suffers from several limitations. The principal once are discussed below:

Skewed distribution of turnover: 

The distribution of trading turnover is highly skewed. As of early 1997, specified shares (or a group of shares) which constituted will be less than 2% in number of of the the listed scripts accounted for over 95% of the trading turnover. (Note that the specified shares accounted for about 55% of market capitalisation). More important, four pivotals, viz., Reliance industries limited, State Bank of India, ITC and Tata Steel accounted for over 70% of the turnover of the specified shares. Thanks to such skewed distribution of trading, most shares are traded in frequently and, hence, lack liquidity.

Scarcity of floating stocks: 

In general there is a scarcity of floating stocks in India. This seems to be caused by the following reasons:

1. Joint stock companies, Financial institutions and large individual investors, collectively own nearly three quarters of the equity capital in the private sector, generally do not offer their holding for trading.

2. Indian investors traditionally have sticky portfolio habits. 

Due to the scarcity of floating stocks the market tends to be high volatile and more easily amenable to manipulation.

Dilatory settlement 

Trades are settled by physical delivery of securities accompanied by transfer deeds. The physical movement of securities from the seller to the sellers broker (through the clearing house of the exchange or directly) and from the buyer's broker to the buyer makes the settlement dilatory. The problem is further accentuated because the buyer has to lodge the securities with the company or its transfer agents for transfer and process of transformer take one to three months.

Counterparty risk 

Barring the National Securities Clearing Corporation (NSCC) which was set up in 1996 for guaranteeing all trades on NSE, clearing corporations do not presently exist for the other exchanges hence some counterparty risk exists on the other exchanges. of course be improved management of exchanges and the creation of trade guarantee fund such risk has diminished.

Preponderance of Speculative Trading 

There is a preponderance of speculative trading, where the primary motive is to derive benefits from short term price fluctuation. It appears, that's very small fraction of transactions represent purchases/sales by genuine investors.

Price rigging 

Often, companies issuing securities in the domestic capital market or International capital market have a tendency to artificially question the prices before the issue of securities. A common way of doing this is to resort to circular trading - parties buy and sell stocks among themselves and pushed the prices up.

Insider trading 

Insider trading is common in India. In such trading, insiders, who are privy to price-sensitive information, use such information to their advantage. Though security exchange board of India introduced its first set of regulation to curb insider trading in November 1992, they have remained mainly only on paper.