Volatility:

Let us now discuss some basic parameters that enables one to gauge the functioning of the stock market as a whole, which makes it easier to know if the stock market is developed and mature or not. The parameters that we should look at in order to judge the functioning of equity markets are: volatility, liquidity, size of the market, and transactions cost. Volatility of a stock is a measure of the frequency with which its price changes over a period of time. If the price changes frequently, it means that the stock is volatile. Investors tend to avoid shares with high volatility because of the risks involved. Volatility of stocks also influences the outside flow of funds, and hence has a macroeconomic dimension. Proximate factors like speculation and trading and  settlement systems, as well as other factors like government policies, interest rates, inflation, and the regulatory framework for  equity markets all affect volatility in the stock market.

Liquidity is a very important indicator of the proper functioning of stock markets. The situation with regard to liquidity greatly  influences stock market efficiency and  development. A market is considered liquid when large volumes of trade can take place without significant effect on stock prices. If an investor is able to transact at a price close to the current market price, the market is considered very liquid. There are two methods for measuring liquidity: the turnover ratio and the value traded ratio. The turnover ratio equals the ratio of the total value of domestic shares traded to total market capitalisation. This ratio seeks to measure the trading of domestic equities in domestic markets relative to the size of the market. The more the volume of sale, the higher is the turnover. High turnover is often an indicator of low transactions costs. Even if a market is large, turnover may be low in spite of huge market capitalisation if the volume of trading is low, which can occur if the market is not very active. The other measure of liquidity is the value-traded ratio. This equals the ratio of the total value of domestic shares traded on the major stock exchanges to the GDP. It is a reflection of organised trading of shares as a proportion of GDP and is thus a macro-level indicator of liquidity in the capital markets.