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Chapter 17 Stock exchanges and stock indices

Stock exchanges and stock indices

Even though this section is devoted to forex education, we will also touch on the stock exchanges and stock indices. At first glance, it seems that the chapter is not related to Forex, but, in fact, it is. Currency rates are interrelated with the stock indices, therefore such indicators can be a good tool for analyzing and forecasting the forex market.

Before we expand on major stock exchanges, let us consider the participants of the stock market to better understand its structure. As it was said in the previous chapter, people trade securities in the stock market. Emitters (companies and organizations) release securities to attract investments to their businesses. Investors, who have available funds, put money in stocks to get profit in future. Brokers are licensed financial mediators. They help buyers and sellers of securities find each other in order to complete mutually profitable deals. Brokers execute orders of their clients on their behalf, taking commission for it. There are two places for trading securities: stock exchanges and over-the-counter trading systems, which enable traders to work by means of electronic trading platforms. A special company, called the register, keeps track of the emitter’s securities and their holders at present. A portfolio of an investor is registered at the depository. As in any other type of business, there are government regulatory and control authorities, counseling and information agencies on a stock exchange.

So securities are traded on stock exchanges and over-the-counter exchanges. The largest volumes of deals with securities are concentrated in following places:

•NYSE (New York Stock Exchange)

•NASDAQ-AMEX ((National Association of Securities Dealers Automated Quotations and American Stock Exchange)

•LSE (London Stock Exchange)

•TSE (Tokyo Stock Exchange)

•DB (Deutsche Boerse)

•SEHK (Stock Exchange Hong Kong)

We are not going to consider the factors impacting on rates of securities in the long term as it can take much time. We will not classify the securities according to the industries that their emitters operate in. There are several sectors, and each of them is attractive for investors in its own way. When you invest in shares of any company in any industry, one fact is always the same – the bigger the earnings are, the higher the risk is. You should know that there is a quantitative analysis of financial records (annual, quarterly) and a qualitative analysis of a company’s management policy.

Let us focus on the correlation between Forex and the stock exchange market. We already know that the currency rate directly depends on the economic climate in the country. In turn, economic conditions depend on many factors. The overall measure of these factors is the gross domestic product or the GDP. There are several methods of estimating the GDP. Here you should understand that the better a financial position of a company in any industry is (which means higher shares prices on the stock exchange) and the bigger the GDP is, the more stable the currency rate is. It means that if shares of key companies rise in value, the national currency of this country appreciates.

So, the next question is how to judge the market situation of a certain country. For this purpose, special indicators, called the stock indices, were created. Every stock exchange uses certain indices. The stock indices are calculated on the basis of shares price of the companies (in a certain ratio) included in the index formula. Despite a great number of stock indices, every trading platform uses the most important indices that reflect the economic conditions of a country. The most popular stock indices are listed below:

•DJIA (Dow Jones Industrial Average – the Dow) in the USA;

•NASDAQ Composite (National Association of Securities Dealers Automated Quotations) in the USA;

•S&P 500 (Standard and Poor’s 500 Index) in the USA;

•FTSE-100 (Financial Times Stock Exchange 100 Index) in Great Britain;

•DAX (Deutscher Aktienindex) in Germany;

•CAC 40 (Compagnie des Agent de Change 40 Index) in France;

•Nikkei 225 in Japan;

•SMI (Swiss Market Index) in Switzerland;

•RTSI (RTS Index) in Russia.

The stock index value directly depends on share prices included in the index formula. Therefore, for example, the DJIA index owes its strength to the US economic expansion. Otherwise, when the DJIA index decreases, it means that the US economy slows down.

The stock indices have an impact on Forex. As on Forex one currency is bought or sold for another, you should study the dynamics of two stock indices in order to understand how the stock indices affect a currency rate. For example, for the USD/CHF pair, you should study the history of the DJIA and SMI indices. If the DJIA index is growing firmly and the SMI index is sharply declining, then we can suppose that such behavior will inevitably influence Forex, so the US dollar will climb against the Swiss franc. If both indices have an upward dynamics, you should consider by how much the growth dynamics of one index exceeds another’s, but you will not be able to predict the behavior of the currency rate on Forex for sure.

To sum up, we should say that forecasting is a creative process. You can use the stock indicators for predicting currency rate fluctuations on Forex or neglect them. Obviously, your decision will depend on how you trade on Forex. The stock indices applied to forecast currency rate changes make sense only for the medium- and long-term outlooks. Moreover, the stock exchange influence on the currency market has certain inertia and is not instant. In some cases, the inverse effect occurs when currency rates impact on stock prices. Therefore, it is important to understand what influence comes first, and it is not always a simple task. Finally, it is your choice to use or ignore the information of this chapter. But you have to remember that global economic processes are interrelated!


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