The Stock Exchange of the Modern World - Essay Example

The factors that determine and influence the return and/or price of stocks are coined as the determinants of the stock market return. These forces are multitudinous and largely decided by macroeconomic variables, which are beyond the control of an individual firm. The price in the stock market is determined by two important forces, namely demand, and supply. These two forces decide the price at a certain point in time and the return from the holdings of an investor by comparing the price paid for the shares and the price received when they are disposed of.
However, these forces are decided by many factors, which include both internal and external variables that can influence the investment decision of investors. From another perspective, these factors may be categorized as systematic factors (economic, political, or sociological changes) that are common to all securities and unsystematic factors (company-specific factors), which are unique to certain industries or firms. This chapter is meant to document the studies and research undertaken across different parts of the world on the subject matter of stock market return and its determinants. This literature review covers a wide spectrum of empirical as well as non-empirical studies conducted to study the economic as well as non-economic variables, which influence market behavior and return individually and collectively.

2.0 Stock Market
In today’s investment arena stocks have been widely accepted as the most important investment avenue for individual as well as institutional investors. A stock is referred to as a financial claim against the real assets of a firm. It represents a valid legal claim in favor of its holder for the right to get a periodical return and capital appreciation if any. It not only represents the partial or pro-rata ownership of the investors in a firm but it also allows them to influence the decisions affecting the day-to-day affairs of the company. One of the most appealing features of the stock investment is that it provides maximum protection and liquidity to the investors by allowing easy trading at the stock exchange at agreeable prices.
Even though stock represents ownership in a company, it does not mean that the shareholders are liable for the whole liabilities of the firm as the law protects them from all the obligations and liabilities incurred by the company. Multitudinous studies indicate empirical evidence of the correlation between stock returns and different firm-level characteristics such as firm size, earnings/share, free cash flows, etc. These studies indicate that stocks having favorable indicators such as a book-to-market value, high earning price shares tend to outperform even growth stocks with relatively low book-to-market value, etc (Hou, Karolyi & Kho, 2006).