A big question that runs in the minds of newbies is what is a stock exchange. The next question that newbies often search for is the “stock index meaning”. So this article will try to answer these questions for a newcomer in the stock market.
What is Stock Exchange?
We have already learned about the basics of the share market. A stock exchange is basically another name for the stock market. A stock exchange is a place where all the company’s stocks are listed. We also learned that we need a broker to trade or invest in the stock markets. So these brokers have their accounts on the stock exchange. If we buy or sell a share, the order does not go to the broker, rather it goes to the stock exchange through the broker.
How Does Stock Exchange Work?
So whatever stock or share you are buying or selling all these jobs are executed on the stock exchange. The broker is just an intermediary who acts between a trade or investor and the stock exchange. For this job, the broker charges a small amount which is known as brokerage.
Renowned Stock Exchanges in India
There are a few renowned stock exchanges in India, one is the Bombay Stock Exchange or BSE, and the other is the National Stock Exchange or NSE. Lately, another stock exchange has emerged to trade the commodities. That is known as the Multi Commodity Exchange or MCX. The major business takes place in BSE and NSE.
The Role of SEBI in Controlling a Stock Exchange
We have already answered the question of what the stock exchange is. We understood that here companies list their shares to start trading. Stock exchanges offer the companies their platform to list their shares for trading. Apart from this the stock exchanges also monitor the financial results and reports of the companies. These stock exchanges and the brokers and the investors are governed by a body called the Securities and Exchange Board of India or SEBI. SEBI looks after whether the exchanges and the brokers and the companies and the investors doing their jobs properly or not. Any company wanting to list its shares in the stock exchanges needs to take approval from SEBI. Once they are approved they can come up with their initial public offering or IPO and get listed on the same exchange where their IPO is floated.
Stock Index Meaning
So now “what is a stock exchange” is clear to us and now it’s time to know “stock index meaning”. From time to time we hear or read about Sensex or Nifty on the TV, newspaper, forums, etc. We get to know that Sensex has risen so and so points or Nifty has fallen by so and so points. So what are they?
What is a Stock Index?
Can you answer this small question? How can we guess how the economic development of India is going on? GDP is one criterion to judge economic development. And another way to judge economic development is the performance of shares of companies. But we can’t track all companies as a whole. Rather we can track the performance of big companies that are among the top positions in their industry. For example Reliance Industries or ITC or Tata Motors etc. This is the base concept of a stock index. We track the performance of a benchmark index to track the performance of the stock market as a whole.
Sensex and Nifty
In BSE there are almost 5400 companies. But to calculate the performance of the exchange easily top 30 companies on the basis of market capitalization are taken to form a benchmark index. Market capitalization is the total number of equity shares of a company multiplied by the current market price. These 30 companies are from different sectors. The average of the market capitalization of these top 30 companies is called Sensex which is the index of BSE.
Similarly, there are almost 1700 companies in NSE. Out of these 1700 companies, we only follow the top 50 companies, on the basis of their market capitalization to form the index of NSE or Nifty. So, the meaning of a stock index is clear to us now. The Nifty 50 index is rising does not mean that all the shares in NSE are rising. Rather it means that the weighted average of the market capitalization of the top 50 companies of NSE is rising.
The Components of a Stock Index
Another point to remember when we are going to understand stock index meaning is that the components of the stock indices (indices are plural of the index) are never constant. From time to time the authorities change them on the basis of the company’s performance and market capitalization. As we told you that the stock index is an indication of the country’s economic growth, we see if the market is happy with any union budget the stock index goes up. Similarly, if the market is unhappy with a budget the stock index goes down.
Bull Market and Bear Market
A stock index was introduced in the year 1986 in India. Also in 1994, the Nifty index started its journey. Similar to Indian stock indices, there are stock indices in other countries all over the world. With the performance of the indices, we can judge the performance of the companies in those countries. If the indices are rising it is a bull market, similarly, if the indices are continuously falling it is a bear market. So the stock index can also reveal whether it is a bull market or a bear market.
Conclusion
So we have discussed what is a stock exchange, and we have also discussed the stock index meaning. Understanding the stock exchange and stock index is essential for anyone who wants to invest or trade in the stock market. By knowing the basics of the stock exchange and the stock index, investors can make informed decisions and maximize their returns.
