Stock market indices are the barometers of the stock market
China Indexes | FTSE Russell
A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The stock market is one of the most important sources for companies to raise money.
This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. The index is a diversified portfolio.
It includes oil companies, banks, software companies, etc and is not sector specific. It includes listings from every facet of the economy. The stock market has sometimes been a remarkably good forecaster of the economy. For example, in the early s, stock prices rose sharply, in anticipation of a doubling of profit in and another doubling of profit in From late onwards, stock prices did badly.
This was in anticipation of big declines in profit: Similarly, in and , profits grew sharply, and the stock market captured this in prices ahead of events. The price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up coming economy.
In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption.
But from experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur—so that excessive optimism euphoria may drive prices unduly high or excessive pessimism may drive prices unduly low. So the question arises: Can the stock market be considered as a reliable barometer of a country's economy? Lets move forward by taking a few examples. Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in Ever since President Mugabe's disastrous land-reform campaign an entire article in itself , the country's farming, tourism, and gold sectors have collapsed.
Yet something odd is happening.
The small Royal Bhutan Stock Exchange RBSE currently trades only 13 companies. Does the growth of Bhutan depends only upon these 13 companies? There are nearly seven lakh companies in India, of which only 6, or so are listed on our exchanges. Though nearly 9, scrips are listed on our exchanges, more than half are not quoted or traded. Another 25 per cent were quoted only a couple of times last year. The shares of just the top 10 companies commanded nearly 45 per cent of the trade turnover last year.
Contrast this with the NYSE, where no single scrip normally enjoys more than one per cent of the turnover. Though market players and exchanges brag about India having the largest number of listed scrips like having the largest cattle population in the world , only about a hundred are active. More than 70 per cent of trading, even in these hundred or so scrips, is not for delivering these shares.
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It is for squaring-off purposes. In other words, the participants do not even see these scrips, and a true "scripless trading" is in place. A substantial portion of the transaction is for gains or losses at the margin and it is the day-traders who square-off within the day who are active in the market. Hence, the stock market is no barometer, either for India's corporates or its economy. 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. As a result, investment has also not risen commensurately which again suggests that the financial markets dance to a tune of their own. 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.
But often it is manipulated to give an untrue picture. The aim is to boost the stock prices of certain corporations through stock market manipulations. Unscrupulous profiteers jack up stock prices to earn huge profits leading to losses for the small investors.
So obviously the BSE price index is not the indicator of indian economy in any sense.
Stock Market Today
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