Almost all of us, feel very excited when the stock market indices go up and make the front page news. Needless to say, almost everybody of us, feel very disheartened when the stock market indices dip down. It can be said, that without stock markets and its news, our day does not start and end.
What’s so exciting or what’s so disheartening about these Stock Markets?
Well, it would not be easy to explain the phenomenon, but let’s try to first get our Market Basics right.
This series of article aims to introduce and explain some basic fundamentals about Stock Markets.
Primarily, stock markets have two sub divisions viz. Primary Market and Secondary Market.
What is a Primary Market?
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO).
Methods of issuing securities in the primary market are:
Initial public offering;
Rights issue (for existing companies);
What is a Secondary Market?
The secondary market is the financial market where previously issued securities (in primary market) and financial instruments such as stock, bonds, options, and futures are bought and sold.
Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investor or speculator to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly;
Primary and Secondary Markets function through Stock Exchanges. In India, there are many Stock Exchanges (Regional as well as National), through which dealings in primary and secondary markets are carried out.
As said earlier, the functioning/performance of these Stock Markets is depicted by Stock Market Indices/Indexes. In India, the Indexes of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two major Indices, which are looked at as a barometer of the performance of the Stock Markets.
Bombay Stock Exchange is the oldest and National Stock Exchange is the largest stock exchange in India.
We normally hear that BombayStock Exchange’s Index is called as SENSEX and National Stock Exchange’s Index is called NIFTY. What are theses Indexes?
An index is basically a numerical indicator. It gives us a general idea about whether most of the stocks have gone up or most of the stocks have gone down.
The Sensex & Nifty are mere “Index (number)” calculated by BSE & NSE.
The Sensex is an indicator of all the major companies of the BSE.
The Nifty is an indicator of all the major companies of the NSE.
If the Sensex/Nifty goes up, it means that the prices of the stocks of most of the major companies on the BSE/NSE have gone up. If the Sensex/Nifty goes down, this tells you that the stock price of most of the major stocks on the BSE/NSE have gone down.