Download B.A 5th Semester, Sub: Economics (M). Paper: 5.04 By : Surabi

. B.A 5th Semester, Sub: Economics (M). Paper: 5.04
By : Surabi Dutta.
STOCK MARKET INDEX: A stock market index is a method of measuring assertion of the stock
market. Many indices are cited by news or financial services firms and are used as benchmarks, to
measure the performance of portfolios such as mutual funds .Alternatively, an index may also be
considered as an instrument (after all it can be traded) which derives its value from other instruments
or indices. The index maybe weighted to reflect the market capitalization of its components, or may
be a simple index which merely represents the net change in the prices of the underlying
instruments. Most publicly quoted stock market indices are weighted. The daily results of stock
market indexes are perhaps the most popular numbers cited in the finance and investing world. The
Dow Jones Industrial Average (DJIA) is probably the best-known and most widely followed stock
market index in the world. It consists of 30 large, publicly traded firms in the United States.
The S&P 500 Index is also very popular. The 500 companies included in the S&P represent over 70%
of the total market capitalization of all stocks traded in the U.S.
The Nasdaq Composite is a broad market index that encompasses about 4,000 issues traded on the
Nasdaq National Market -- virtually every firm that trades on the exchange.
Indices are also used to gauge activity in an economy. Perhaps the best known economic index in the
United States is the CPI, or Consumer Price Index, which measures inflation
Usefulness:
1.Stock market indices are useful in understanding the level of prices and the trend of price
movements of the market. A stock market index is created by selecting a group of stocks that are
capable of representing the whole market or a specified sector or segment of the market. The
change in the prices of this basket of securities is measured with reference to a base period. There
is usually a provision for giving proper weights to different stocks on the basis of their importance in
the economy. A stock market index act as the indicator of the performance of the economy or a
sector of the economy.
2. Indices function as a status report on the general economy. Technical analysts use these
indices to predict the future market. The investor can use the indices to allocate the funds rationally
among the stocks. Indices help to recognize broad trends in the market.BSE SENSEX,NSE-50 etc
are some of the market indices. Stock market indices are the barometer of the stock market.
STOCK EXCHANGE: A stock exchange can be defined as a centralized market for buying and
selling stocks where the price is determined through supply-demand mechanism. According to the
Securities Contracts(Regulation)Act ,1956,which is the main law governing stock exchanges in India,
“stock exchange means any body of individuals, whether incorporated or not, constituted for the
purpose of assisting, regulating, or controlling the business of buying, selling or dealing in securities.
In stock exchanges , continuous trading in securities takes place and the trade occurs at
different prices. As a result even on a single day, prices of securities may fluctuate. On any trading
day, four prices can be easily defined, namely, opening price, closing price, the highest price of the
day and the lowest price of the day. Ordinarily prices move in a cyclical fashion, alternatively
showing increasing and decreasing tendencies. The short term and the long term fluctuations in
prices of securities are indicators of the variations in the economic variables.
Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market. Stock
Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place
where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations.
It performs various functions and offers useful services to investors and borrowing companies. It is an investment
intermediary and facilitates economic and industrial development of a country. Stock exchange is an organized
market for buying and selling corporate and other securities. Here, securities are purchased and sold out as per
certain well-defined rules and regulations. It provides a convenient and secured mechanism or platform for
transactions in different securities. Such securities include shares and debentures issued by public companies which
are duly listed at the stock exchange, and bonds and debentures issued by government, public corporations and
municipal and port trust bodies.
Stock exchanges are indispensable for the smooth and orderly functioning of corporate sector in a free market
economy. A stock exchange need not be treated as a place for speculation or a gambling den. It should act as a
place for safe and profitable investment, for this, effective control on the working of stock exchange is necessary. This
will avoid misuse of this platform for excessive speculation, scams and other undesirable and anti-social activities.
London stock exchange (LSE) is the oldest stock exchange in the world. While Bombay stock exchange (BSE) is the
oldest in India. Similar Stock exchanges exist and operate in large majority of countries of the world.
Definitions of Stock Exchange
According to Husband and Dockerary,
"Stock exchanges are privately organized markets which are used to facilitate trading in securities."
The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as,
"An association, organization or body of individuals, whether incorporated or not, established for the purpose of
assisting, regulating and controlling business in buying, selling and dealing in securities."
Features of Stock Exchange
1.
Characteristics or features of stock exchange are:-
Market for securities : Stock exchange is a market, where securities of corporate bodies, government and
semi-government bodies are bought and sold.
2.
Deals in second hand securities : It deals with shares, debentures bonds and such securities already
issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary
market.
3.
Regulates trade in securities : Stock exchange does not buy or sell any securities on its own account. It
merely provides the necessary infrastructure and facilities for trade in securities to its members and brokers who
trade in securities. It regulates the trade activities so as to ensure free and fair trade
4.
Allows dealings only in listed securities : In fact, stock exchanges maintain an official list of securities
that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are
called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.
5.
Transactions effected only through members : All the transactions in securities at the stock exchange
are effected only through its authorised brokers and members. Outsiders or direct investors are not allowed to
enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange
through the authorised brokers only.
6.
Association of persons : A stock exchange is an association of persons or body of individuals which may
be registered or unregistered.
7.
Recognition from Central Government : Stock exchange is an organised market. It requires recognition
from the Central Government.
8.
Working as per rules : Buying and selling transactions in securities at the stock exchange are governed by
the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and
guidelines is allowed in any case. Specific location : Stock exchange is a particular market place where
authorised brokers come together daily (i.e. on working days) on the floor of market called trading circles
and conduct trading activities. The prices of different securities traded are shown on electronic boards. After
the working hours market is closed. All the working of stock exchanges is conducted and controlled through
computers and electronic system.
Financial Barometers : Stock exchanges are the financial barometers and development indicators of national
economy of the country. Industrial growth and stability is reflected in the index of stock exchange.
Some of the Important Functions of Stock Exchange/Secondary Market are listed
below:
1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a
country. Every major change in country and economy is reflected in the prices of
shares. The rise or fall in the share prices indicates the boom or recession cycle of the
economy. Stock exchange is also known as a pulse of economy or economic mirror
which reflects the economic conditions of a country
2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply
factors. The securities of profitable and growth oriented companies are valued higher
as there is more demand for such securities. The valuation of securities is useful for
investors, government and creditors. The investors can know the value of their
investment, the creditors can value the creditworthiness and government can impose
taxes on value of securities.
3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities
include the companies names in the trade list only after verifying the soundness of
company. The companies which are listed they also have to operate within the strict
rules and regulations. This ensures safety of dealing through stock exchange.
4. Contributes to Economic Growth:
In stock exchange securities of various companies are bought and sold. This process
of disinvestment and reinvestment helps to invest in most productive investment
proposal and this leads to capital formation and economic growth.
5. Spreading of Equity Cult:
Stock exchange encourages people to invest in ownership securities by regulating new
issues, better trading practices and by educating public about investment.
6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits
healthy speculation of securities.
7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of
securities. The presence of stock exchange market gives assurance to investors that
their investment can be converted into cash whenever they want. The investors can
invest in long term investment projects without any hesitation, as because of stock
exchange they can convert long term investment into short term and medium term.
8. Better Allocation of Capital:
The shares of profit making companies are quoted at higher prices and are actively
traded so such companies can easily raise fresh capital from stock market. The general
public hesitates to invest in securities of loss making companies. So stock exchange
facilitates allocation of investor’s fund to profitable channels.
9. Promotes the Habits of Savings and Investment:
The stock market offers attractive opportunities of investment in various securities.
These attractive opportunities encourage people to save more and invest in securities
of corporate sector rather than investing in unproductive assets such as gold, silver,
etc.