This paper studies the behavior of the stock price in a market characterized by the presence of one large trader and a fringe of marginal ‘noise’ traders. The study shows that price volatility and sensitivity excessively depend on the large trader’s behavior. The paper also comments on the implications of these properties for the derivatives market. Investor Confidence Globally, investor confidence in the capital market is considered important for the economic development of a country. Deep bear market, corporate scandals, insider trading, and inaccuracy of financial statements are cited as reasons for lack of investor confidence in many countries. Revival of such confidence is necessary to improve the efficiency of the securities market in converting savings to investment.

In the Indian context, it is indicated that regulation for investors’ protection in the new issues market is vital. The number of small investors in this market is massive. Unfortunately, market studies show that in the Indian stock market higher risk is not priced (Madhusoodanan, 1997), and Indian IPOs are overpriced in the long run (Kakati, 1999). As a result, the equities markets suffer serious inadequacies as a mechanism for raising capital (Gokarn, 1996). A SEBI-NCAER report (2000) indicates that despite the expansion of the securities market, only 1.4% of household savings is channeled into it. 80% of these households are first generation investors, so, retaining their confidence is important. Overall, the secondary market is made safer with reforms but primary market is perceived riskier than before.