STOCK

EXCHANGE &
PORTFOLIO
MANAGEMENT
THE PROJECT REPORT
ON
IMPACT OF
CURRENCY MARKET
TO STOCK MARKET
 VIVEKANAND COLLEGE FOR
B.B.A.
T.Y.B.B.A (FINANCE)
SUBMITTED BY ROLL NO
KALGUDE DIPALI D. 17
KIKANI JITAXI G. 19
PATEL BHAVISHA P. 42

SUBMITTED TO:
M/S KHOOSHBU VORA

ACADAMIC YEAR-2009-10

INTRODUCTION:
STOCK MARKET:

The term for the overall market in which shares are issued and traded on
exchanges or in over-the-counter markets. Also known as the equity market, it is
one of the most vital areas of a market economy because it provides companies
with access to capital and allows investors to own companies and participate in
economic growth.

The stock market is made up of the primary and secondary markets. The
primary market is where new issues (IPO’s) first are offered, with any subsequent
trading going on in the secondary market.

CURRENCY MARKET:
Currency Market Updates provides traders worldwide with daily reports
and relevant information for their forex, stocks, options and futures trading.

DIFFERENCE BETWEEN CURRENCY MARKET & STOCK

MARKET:

One big difference in technical analysis between the forex markets and
the equity markets is that the forex markets are affected more by macroeconomic
factors while equity markets are affected by individual company's microeconomic
factors. This is important for technical analysis because macroeconomic
principles may affect a certain industry that a company's stock is trading in but it
may not affect a company's specific stock. Similarly, macroeconomic factors will

affect a country's currency and can make a currency's value rise or fall against
another currency, though the effects may not be immediate.
IMPACT OF CURRENCY MARKET ON STOCK MARKET:

The foreign exchange market (forex, FX, or currency market) is a worldwide

decentralized over-the-counter financial market for the trading of currencies.
Financial centers around the world function as anchors of trading between a wide
range of different types of buyers and sellers around the clock, with the exception
of weekends.

The purpose of the foreign exchange market is to assist international trade and
investment. The foreign exchange market allows businesses to convert one
currency to another. For example, it permits a U.S. business to import European
goods and pay Euros, even though the business's income is in U.S. dollars.
Some experts, however, believe that the unchecked speculative movement of
currencies by large financial institutions such as hedge funds impedes the
markets from correcting global current account imbalances. This carry trade may
also lead to loss of competitiveness in some countries.

In a typical foreign exchange transaction a party purchases a quantity of one

currency by paying a quantity of another currency. The modern foreign exchange
market started forming during the 1970s when countries gradually switched to
floating exchange rates from the previous exchange rate regime, which remained
fixed as per the Breton Woods system.

The foreign exchange market is unique because of

• trading volume resulting in market liquidity.

• geographical dispersion

• continuous operation: 24 hours a day except weekends, i.e. trading from

20:15 UTC on Sunday until 22:00 UTC Friday
 • the variety of factors that affect exchange rates
• the low margins of relative profit compared with other markets of fixed
income
• the use of leverage to enhance profit margins with respect to account size

Economic factors

These include:
(a) economic policy, disseminated by government agencies and central banks,
(b) economic conditions, generally revealed through economic reports, and
other economic indicators.

• Economic policy comprises government fiscal policy (budget/spending

practices) and monetary policy (the means by which a government's
central bank influences the supply and "cost" of money, which is reflected
by the level of interest rates).
• Government budget deficits or surpluses: The market usually reacts
negatively to widening government budget deficits, and positively to
narrowing budget deficits. The impact is reflected in the value of a
country's currency.
• Balance of trade levels and trends: The trade flow between countries
illustrates the demand for goods and services, which in turn indicates
demand for a country's currency to conduct trade. Surpluses and deficits
in trade of goods and services reflect the competitiveness of a nation's
economy. For example, trade deficits may have a negative impact on a
nation's currency.
• Inflation levels and trends: Typically a currency will lose value if there is a
high level of inflation in the country or if inflation levels are perceived to be

• rising. This is because inflation erodes purchasing power, thus demand,

for that particular currency. However, a currency may sometimes
 strengthen when inflation rises because of expectations that the central
bank will raise short-term interest rates to combat rising inflation.
• Economic growth and health: Reports such as GDP, employment levels,
retail sales, capacity utilization and others, detail the levels of a country's
economic growth and health. Generally, the more healthy and robust a
country's economy, the better its currency will perform, and the more
demand for it there will be.
• Productivity of an economy: Increasing productivity in an economy should
positively influence the value of its currency. Its effects are more prominent
if the increase is in the traded sector .

Political conditions

Internal, regional, and international political conditions and events can have a
profound effect on currency markets.
All exchange rates are susceptible to political instability and anticipations about
the new ruling party. Political upheaval and instability can have a negative impact
on a nation's economy. For example, destabilization of coalition governments in
Pakistan and Thailand can negatively affect the value of their currencies.
Similarly, in a country experiencing financial difficulties, the rise of a political
faction that is perceived to be fiscally responsible can have the opposite effect.
Also, events in one country in a region may spur positive/negative interest in a
neighboring country and, in the process, affect its currency.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market
in a variety of ways:

• Flights to quality: Unsettling international events can lead to a "flight to

quality," with investors seeking a "safe haven." There will be a greater
demand, thus a higher price, for currencies perceived as stronger over
their relatively weaker counterparts. The Swiss franc and gold have been
traditional safe havens during times of political or economic uncertainty.
• Long-term trends: Currency markets often move in visible long-term
trends. Although currencies do not have an annual growing season like
physical commodities, business cycles do make themselves felt. Cycle
analysis looks at longer-term price trends that may rise from economic or
political trends.
• "Buy the rumor, sell the fact": This market truism can apply to many
currency situations. It is the tendency for the price of a currency to reflect
the impact of a particular action before it occurs and, when the anticipated
event comes to pass, react in exactly the opposite direction. This may also
be referred to as a market being "oversold" or "overbought”. To buy the
rumor or sell the fact can also be an example of the cognitive bias known
as anchoring, when investors focus too much on the relevance of outside
events to currency prices.
• Economic numbers: While economic numbers can certainly reflect
economic policy, some reports and numbers take on a talisman-like effect:
the number it becomes important to market psychology and may have an
immediate impact on short-term market moves. "What to watch" can
change over time. In recent years, for example, money supply,
employment, trade balance figures and inflation numbers have all taken
turns in the spotlight.
 • Technical trading considerations: As in other markets, the accumulated
price movements in a currency pair such as EUR/USD can form apparent
patterns that traders may attempt to use. Many traders study price charts
in order to identify such patterns.

Forex Trading Compared to Stock Trading

Understanding Forex VS Stocks

There are advantages and disadvantages to both markets. That being said, the
forex market offers traders a number of opportunities and advantages that stocks
just can't compete with, and over the past several decades, large numbers of
stock traders have drifted over to currencies.

A major difference is informational. Currency values are almost exclusively

affected by two different types of events: developments of importance to entire
macroeconomics and geopolitical events. Stocks are affected by these things as
well, of course, but a whole other slew of factors determine the fate of individual
companies. Details as minute as which consultant is hired to negotiate with a
union can drive a stock up or down.

This difference in required information is of huge importance. With stocks, it gives

a huge advantage to large trading firms who can afford to hire researchers to
track the happenings at various companies. It can be a great advantage if you
are the one with the information, but more often than not, it's just a group of Wall
Street insiders and no one else who knows about such things in a timely fashion.

Since most of the information that moves forex markets is of a more public
nature–often published by governments or major events that everyone has to
follow through the media–the forex market does not offer the same institutional
disadvantages to individual traders as does the stock market.
That being said, if you've spent your life in a particular industry, you won't have
the same sort of advantage that you would if you traded stocks in just that
industry. Even in that scenario, though, you'll still face an uphill battle against
large investment firms.

Another difference is volatility. Obviously, the stock market itself – which is to say
nothing of individual stocks – is far more volatile than the world's major
currencies. You can always increase your effective volatility by increasing how
much your investment is leveraged. However, you can't reduce the
volatility of the stock market. Quite often, that is a problem which
requires to you to diversify more than you would have to in the forex
market in order to avoid excessive risk, thus further complicating your
task as an investor.