Insight into Stock Market Economy

Stock Market Economy

The Stock Exchange, “share market” or a “bourse” is a mutual organization for traders or “stock brokers” who trade in different company securities and stocks. Companies or businesses have to be “listed” in the bourses in order for any trading or exchange in their “shares” or equities to be carried out. Stock markets are also the place for trading in unit trusts and bonds issued by the government.

Like most other markets, the Stock market economy also depends on a number of factors with investor confidence being one of the keys. The amount of money that an investor will put on a share of a particular company depends on his perception of the company doing well in future or has been doing so for the past period. By putting in his money in the share of a company, the person becomes entitled to a share of the profit or loss the company makes. The initial offering of stocks and bonds is carried on at the primary market whereas trading of securities happens at the secondary market. Exchange of stocks, however, is the most important function of the Stock Market.

In the long run, as the shares are owned by the companies themselves, improved profits of the company are reflected in high stock prices also resulting in high stock indices. But the stock market is known as being one of the most volatile markets with ups and downs much difficult to comprehend than highs and lows in corporate profits. Swings in stock markets are known to be driven more by the speculative psychology of investors than actual economic analysis. Stock markets are sometimes said to be characterized by irrational exuberance rather than corporate performance being the real cause. Some analysts also point out that increased earnings on the part of investors will engage them more in speculative activities in the stock market.

Some of the most important stock indices reflecting the swings in the stock prices are:

Dow Jones Industrial Average
Standard and Poor 500 Index
NASDAQ
NYSE (New York Stock Exchange)

The major Indian Stock indices such as the Sensex and the Nifty have also shown huge increases from the early 1990’s and although Dalal Street experienced huge crashes in-between.

While stock market capitalization in India has increased by four times in the decade of 91’-92’ to 2001-02, capital formation in the country had barely increased over that decade. As a result, investment has also not risen commensurately which again suggests that the financial markets dance to a tune of their own. Upward swings in the stock market in early 90’s were mainly caused by a rise in Foreign Institutional Investment which only led to increase in the country’s foreign exchange reserves.

Although Stocks can mobilize savings into investment and can cause the growth of the company and increase its market share, it is not always a barometer of the economy in its true sense. Redistribution of wealth is not always indicated as fallout of a surge in the Stock indices. However, socio-political stability devoid of any recessionary effects can have a positive influence on the Stock Market Economy.

http://www.economywatch.com/market-economy/stock-market-economy.html