How stock markets really work?

Headline : How stock markets really work?

Details :

What is Market Capitalisation?

  • Market capitalisation or value is the price of individual shares multiplied by total number of shares in the issue.
  • Companies have a dominant shareholder, which can be the government or some promoting group or a business family.
  • Remaining shares are held by institutions (LIC, mutual funds and so on) and individuals.


What is a stock market index?

  • A stock index or stock market index is a measurement of a section of the stock market.
  • It is computed from the prices of selected stocks (typically a weighted average).
  • It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments.


What is scrip?

  • A scrip (or chit in India) is any substitute for legal tender and is often a form of credit.
  • Scrips have been created for payment of employees under truck systems and for use in local commerce at times when regular currency was unavailable.


When did share trading start in India?

  • The concept of incorporated companies and share trading started in the 1840s in India.
  • Initially facilitated by unregistered brokers, it led to India’s first market boom and bust.
  • The US Civil War saw supply of cotton to British mills slashed while companies trading in Indian cotton profited.
  • This led to a bull run that started in 1861 and went bust after the 1865 surrender of Confederate General Robert Lee to Union General Ulysses S Grant.
  • India’s first stock market, the Bombay Stock Exchange, was set up in 1875 and the Sensex launched in 1986.


Does the index include the market cap of all companies listed in the BSE?

  • No, only 30 scrips are selected whose market caps are used to calculate the value of the Sensex.
  • The scrip selection generally takes into account a balanced representation of the listed companies in the exchange.
  • There are other broad-based indices like BSE 100 and BSE 200 that include higher number of scrips. In terms of number of listed companies,
  • BSE is the world’s largest stock exchange.



How is the value of Sensex calculated?

  • The index helps compare present-day share prices with the past to show how the market is moving.
  • Sensex’s base year is 1978-79.
  • This means the value of the index was equated to 100 for that year.
  • After fixing base year market capitalisation (price of individual shares multiplied by total shares in the issue) was calculated.
  • The present value is arrived at by calculating present market value, dividing it by base year market value, and multiplied by base index value: 100 in this case.
  • Shares held by government or promoter are generally not traded.
  • So Sensex has to be adjusted for free float market-cap value.
  • This means the index is calculated on publicly-traded shares. So a company with large market cap but few publicly traded shares cannot influence it.




Section : Economics