Economics Notes on Stock Market for SSC CGL

In this post we are providing economics notes on Stock Market. Economics always plays an important role in every competitive exam. In SSC CGL exam, economics stand for 6 to 7 marks.

Stock Exchange

• The word “Stock Exchange” is made from two words 'Stock' and Exchange.
• Stock means part or fraction of the capital of a company, and Exchange means a transferring the ownership; representing a market for purchasing and selling.
• Thus, we can describe the stock exchange as a market or a place where different types of securities are bought and sold.
• As the stock exchange deals in all types of securities, it is known as 'securities market' or 'securities exchange' also.
• A stock exchange is a secondary market of securities because the trading happens only for the securities that have already been issued to the public and now being allowed to be traded on the floor of a stock exchange after getting listed in the stock exchange.
• The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market.

Features of Stock Exchange:

Organized Market:

•  All transactions are regulated by the rules and bye-laws of the concerned stock exchange.

Formation & Membership:

•  The membership of the stock exchange is restricted to a certain number, and new members are admitted only when there are vacancies. Every member has to pay the prescribed membership fee.

Only Members Can Trade:

• The Stock exchange is only open to the members of exchange also known as brokers.
• In a stock exchange, transactions take place between members or their authorized agents on behalf of the investors.

Listed Securities:

• To be able to trade a security on a certain stock exchange, it must be listed on the respective stock exchange as per the guidelines issued by the exchange.
• The stock exchanges do not allow trading in each and every company's securities.

Functions of Stock Exchange:

Marketability of Securities:

• The stock exchange provides for easy marketability of securities as securities can be bought and sold conveniently on the floor of the stock exchange.
• The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public and on the other hand, provides investors with a platform to trade these shares.

Price Determination & Continuity:

• Since transactions take place regularly on a stock exchange there is continuity in the dealings.
• Supply and demand in stock markets are driven by various factors and this balance of supply and demand affects the price of stocks.
• Besides, stock exchanges have defined rules and regulations to moderate price fluctuations to ensure continuity in buying and selling.

Barometer of the Economy:

• The intensity of buying and selling of securities and the corresponding rise or fall in the prices of securities reflects the investors' assessment of the economic and business conditions.
• Share prices tend to rise or remain stable when companies and the economy show signs of stability and growth whereas they might fall sharply at the time of an economic recession, stagnation, depression, or financial crisis.
• Change in security prices is eknown to be highly sensitive to changing economic, social and political conditions and hence act as a barometer of economic and business conditions.

Mobility of Capital:

• Investing in other businesses require huge capital outlay whereas investing in shares is open to both the large and small stock investors.
• Stock exchanges furnish an open and continuous market for small investors and their savings that are invested in securities are converted into cash for reinvestment in other securities.
• Thus, stock exchanges provide mobility to capital and facilitate sound investment.

Profit Sharing & Resource Allocation: As a result of stock market transactions, funds flow from the less profitable to more profitable enterprises. All type of stock investors whether they are individuals, professional stock investors, institutional investors earn capital gains through dividends and stock price increases. This enables them to share in the wealth of profitable businesses. Industries which have potentials of growth are able to attract the savings of people towards their ventures relatively more than those which have no such prospects. Thus, financial resources of the economy are allocated on a reasonable basis. Unprofitable and troubled businesses may result in capital losses

The National Stock Exchange of India Limited (NSE)

• NSE is the leading stock exchange of India, located in Mumbai.
• NSE was established in 1992 as the first electronic exchange in the country.
• NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across the length and breadth of the country.
• NSE has a total market capitalization of more than US$1.65 trillion, making it the world’s 12th-largest stock exchange as of 23 January 2015. NSE's flagship index, the
• NSE's flagship index, the CNX Nifty, the 51 stock index, is used extensively by investors in India and around the world as a barometer of the Indian capital markets.

The Bombay Stock Exchange (BSE) 

• BSE is an Indian stock-exchange located at Dalal Street, Mumbai, Maharashtra, India.
• Established in 1875, the BSE is Asia’s first stock exchange.
• It claims to be the world's fastest stock exchange, with a median trade speed of 6 microseconds.
• The BSE is the world's 11th largest stock exchange with an overall market capitalization of $1.7 trillion as of January 23, 2015.
• More than 5500 companies are publicly listed on the BSE.