Stock Market Indices and Monetary Policy: Understanding the Basics
Individual Stock Market Indices
Individual stock market indices in each bag define a general index that measures the performance of a representative set of values. When each session finishes, the overall index indicates whether purchases or sales have prevailed. In Spain, the stock index is the IBEX-35, which represents the 35 largest companies listed on Spanish stock exchanges.
The Stock Market
The stock market is a public service whose function is to facilitate the various negotiations of the values that have been registered and can be bought or sold publicly in a fair and transparent manner.
Functions of the Stock Market
- It channels savings into investments of companies that come to the stock market to raise capital.
- Investors put part of their savings in the stock market to get higher returns.
- It allows investors access to the ownership of publicly traded companies.
- The stock market is very sensitive to any political, social, or financial event, anticipating the events.
- It reflects the functioning of the economy.
- If we see that certain company shares are listed too high in the stock market, it will mean that the company is in good economic health; the stock market acts as a barometer of the health of companies.
- The listed companies do so as a way of financing the company, i.e., a way to raise funds.
Stock Market Features
- The investor can choose where to spend their savings, as the stock price provides a set of very different values.
- This is a regulated market that gives economic security that investment in other markets would not have, being public.
- Provides liquidity to the securities. That is, it is possible to let go of the assets as soon as market expectations change.
The Value of Money and Money Demand
The demand for money is the need for operators to hold cash for transactions to be conducted. It’s called liquidity needs. Traders get money through earned income, rents, interest on capital, profits, etc., and do it in two ways: in cash or through bank accounts in the form of titles.
On the other hand, an operator may need money for three reasons:
- Transactions: to buy goods and services.
- Caution: to cope with unforeseen events.
- Speculation: to benefit from the reduction of an asset when it presents a good opportunity.
The Bank of Spain
The Bank of Spain has the following functions:
- Define and implement monetary policy to achieve price stability, implementing foreign exchange policy and conducting foreign exchange operations, as well as holding and managing the official reserves of member countries’ currencies.
- Promote the smooth operation of payment systems.
- Issue legal tender banknotes.
Besides these, the Bank of Spain has the following additional functions:
- Hold and manage currency reserves and precious metals not transferred to the ECB.
- Monitor the creditworthiness and performance of credit institutions.
- Promote the smooth functioning and stability of the financial system.
- Put coins into circulation.
- Advise the Government, developing and publishing statistics relating to its functions, and assist the ECB in the collection of information.
Currency and Bank Money
Money is made up of legal bills and coins in circulation. The process of issuance of these is determined by the European System of Central Banks (ESCB), indicating to each bank the amount of money that can be issued.
Money is made up of bank deposits held by individuals and all other elements that constitute means of payment created by financial institutions to replace money in commercial transactions (checks, promissory notes, credit cards).