A big question that runs in the minds of newbies is what is stock exchange. The next question that newbies often search for is stock index meaning. So this article will try to answer these questions for a newcomer in the stock market.
We have already learned about what is the stock market. A stock exchange is basically another name of 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 account in 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.
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 that is known as brokerage.
There are few renowned stock exchanges in India, one is Bombay Stock Exchange or BSE, 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 is executed in BSE and NSE.
We have already answered the question “what is a stock exchange”. We understood that here companies list their shares to start trading. Stock exchanges offer the brokers their platform to list their shares and get traded. 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 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 get listed in the stock exchanges, they need to take approval from SEBI. Once they are approved they can come up with their initial public offering or IPO and gets listed on the same exchange where their IPO is floated.
So now “what is a stock exchange” is clear to us and now its time to know “stock index meaning”. Time to time we hear or read about Sensex or Nifty in 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?
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 the economic development id 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 who are among the top positions in their industry. For example Reliance Industries or ITC or Tata Steel etc.
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 chosen from different sectors. The average of the market capitalization of these top 30 companies is called Sensex that is the index of BSE.
Similarly, there are almost 1700 companies in NSE. Out of these 1700 companies, top 50 companies are taken on the basis of their market capitalization to form the index of NSE or Nifty. So, the stock index meaning is clear to us now. The Nifty 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.
Another point to remember when we are going to understand stock index meaning is that the components of the stock indices (indices is the plural or index) are never constant. Time to time they are changed on the basis of the company’s performance and market capitalization. As we told that the stock index is an indication of the country’s economic growth, we see if the market is happy with any budget the stock index goes up. Similarly, if the market is disappointed with a budget the stock index goes down.
A stock index was introduced in the year 1986 in India. Also in 1994, the Nifty index was introduced. 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 bear market.
So we have discussed what is a stock exchange, we have also discussed stock index meaning. I will be happy to answer your queries on the stock exchange and stock index in the comments section.