What is Stock Market?
To
begin with, let’s first understand what exactly does the stock market mean. Stock Market is an index
representing the movement in the share price of major companies listed in the
Stock Exchange of respective Countries. It is a platform where the prospective
buyers meet the sellers and vice versa to carry out the transaction of purchase
or sale of shares. These buyers and sellers are investors who either are in
possession of some shares of any number of companies or are willing or looking
to buy shares of companies.
We
also need to understand the mechanism behind movement of share prices.
Basically, it is a demand and supply mechanism. The demand for shares is
created by the Buyers and its supply is created by Sellers of the shares. The
intention of any Buyer or Seller to transact at stock exchange is based on an
opinion which is popularly known as market sentiments.
Market
sentiments are based on Company’s press briefings, Industry specific
announcements, Government’s macro-economic indicators like GDP growth,
Inflation, Fiscal Deficit, Foreign exchange stability, Industrial Output,
monetary policy etc.
Few Instances
The
National Bureau of Statistics show that, in 2004, China's GDP reached 13.65
trillion Yuan (US$1.65 trillion), rising 9.5 % year-on-year. Meanwhile, the
composite index of the Shanghai Stock Exchange dropped 15.15 %. China's GDP has
maintained a growth rate of more than 7 % in recent years. But the composite
index of the Shanghai Stock Exchange fell gradually, from 2,245 points on June
15, 2001, the highest point, to 1,187 points on February 1, 2005, a six-year
low.
We
can consider even Tehran Stock Exchange (TSE) for its performance. The TSE
index has taken a serious beating since December 2013. It reached
close to 89,000 points before falling to less than 65,000 in early September
2013, when the ministers’ letter was written to President Rouhani. The
letter was written on September 9 2013 but came to light during December 2013.
The brouhaha that followed, however, was not about the TSE and what its
poor performance means for the economy, which appears to be heading for
a double-dip recession. Attention has instead focused on
division within Rouhani’s coalition government and what it means for the
future of his austerity program. This is a loss of more than
one-third in the value of the index, and a similar loss in the wealth held by
those who hold its stocks. The decline in the index is even sharper if we
correct for inflation, registering a loss of 48%.
But,
before we feel sorry for TSE investors, we should consider the amazing run they
had up to December 2013. In the two years before
heading south, the index had risen by 252% in nominal terms and 100%
after accounting for inflation. Even with the sharp decline since 2013,
between December 2011 and September 2015 the index gained 9.4% per year in real
terms. This isn’t bad for an economy in recession and with
negative interest rates.
So,
it could be aptly derived from the above discussion that stock market is a good
indicator of any country’s economic performance but it cannot be considered as
a true indicator of any economy. The reason behind this would be that share
price movements always reflect the market sentiments of investors. In other
words, share market movement is purely investor’s perception which is based on
Buyers and Sellers expectations about the future performance of the companies
listed in stock exchange.
Concluding,
it could be derived that movements in share prices may indicate economic health
of the country’s economy, but never measure it. Economic health of any country
could only be based on the key economic indicators.
-Manish Aakrit
Student, INLEAD
INBM, October 2015
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