A stock exchange, share market or bourse
is a corporation or mutual organization which provides facilities
for stock brokers and traders, to trade company stocks and
other securities. Stock exchanges also provide facilities
for the issue and redemption of securities as well as other
financial instruments and capital events including the payment
of income and dividends.
The
securities traded on a stock exchange include: shares issued
by companies, unit trusts and other pooled investment products
and bonds. To be able to trade a security on a certain stock
exchange, it has to be listed there.
A stock
exchange is often the most important component of a stock
market. Supply and demand in stock markets is driven by
various factors which, as in all free markets, affect the
price of stocks (see stock valuation).
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Usually there
is a central location at least for recordkeeping, but trade is less
and less linked to such a physical place, as modern markets are
electronic networks, which gives them advantages of speed and cost
of transactions. Trade on an exchange is by members only. The initial
offering of stocks and bonds to investors is by definition done
in the primary market and subsequent trading is done in the secondary
market.
There is usually
no compulsion to issue stock via the stock exchange itself, nor
must stock be subsequently traded on the exchange. Such trading
is said to be off exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part
of a global market for securities.
History
of stock exchanges
In 11th century
France the courtiers de change were concerned with managing
and regulating the debts of agricultural communities on behalf
of the banks. As these men also traded in debts, they could be
called the first brokers.
Some stories
suggest that the origins of the term "bourse" come from the Latin
bursa meaning a bag because, in 13th century Bruges,
the sign of a purse (or perhaps three purses), hung on the front
of the house where merchants met.
However, it
is more likely that in the late 13th century commodity traders
in Bruges gathered inside the house of a man called Van der Burse,
and in 1309 they institutionalized this until now informal meeting
and became the "Bruges Bourse". The idea spread quickly around
Flanders and neighbouring counties and "Bourses" soon opened in
Ghent and Amsterdam.
In the middle
of the 13th century, Venetian bankers began to trade in government
securities. In 1351, the Venetian Government outlawed spreading
rumors intended to lower the price of government funds. There
were people in Pisa, Verona, Genoa and Florence who also began
trading in government securities during the 14th century. This
was only possible because these were independent city states ruled
by a council of influential citizens, not by a duke.
The Dutch
later started joint stock companies, which let shareholders invest
in business ventures and get a share of their profits - or losses.
In 1602, the Dutch East India Company issued the first shares
on the Amsterdam Stock Exchange. It was the first company to issue
stocks and bonds. In 1688, the trading of stocks began on a stock
exchange in London.
Roles of
a Stock Exchange
Raising
capital for businesses --The
Stock Exchange provides companies with the facility to raise capital
for expansion through selling shares to the investing public.
Mobilizing
savings for investment -- When people draw their savings
and invest in shares, it leads to a more rational allocation of
resources because funds, which could have been consumed, or kept
in idle deposits with banks, are mobilized and redirected to promote
business activity with benefits for several economic sectors such
as agriculture, commerce and industry, resulting in a stronger
economic growth and higher productivity levels and firms.
Facilitating
company growth Companies
view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its
market share, or acquire other necessary business assets. A takeover
bid or a merger agreement through the stock market is one of the
simplest and most common ways for a company to grow by acquisition
or fusion.
Redistribution
of wealth -- Stocks exchanges do not exist to redistribute
wealth. However, both casual and professional stock investors,
through dividends and stock price increases that may result in
capital gains, will share in the wealth of profitable businesses.
Corporate
governance --
having a wide and varied scope of owners, companies generally
tend to improve on their management standards and efficiency in
order to satisfy the demands of these shareholders and the more
stringent rules for public corporations imposed by public stock
exchanges and the government. Consequently, it is alleged that
public companies (companies that are owned by shareholders who
are members of the general public and trade shares on public exchanges)
tend to have better management records than privately-held companies
(those companies where shares are not publicly traded, often owned
by the company founders and/or their families and heirs, or otherwise
by a small group of investors). However, some well-documented
cases are known where it is alleged that there has been considerable
slippage in corporate governance on the part of some public companies
(Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam
(2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or
Parmalat (2003), are among the most widely scrutinized by the
media).
Creating
investment opportunities for small investors -- As
opposed to other businesses that require huge capital outlay,
investing in shares is open to both the large and small stock investors because a person buys
the number of shares they can afford. Therefore the Stock Exchange
provides the opportunity for small investors to own shares of
the same companies as large investors.
Government
capital-raising for development projects -- Governments
at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works
or housing estates by selling another category of securities known
as bonds. These bonds can be raised through the Stock Exchange
whereby members of the public buy them, thus loaning money to
the government. The issuance of such municipal bonds can obviate
the need to directly tax the citizens in order to finance development,
although by securing such bonds with the full faith and credit
of the government instead of with collateral, the result is that
the government must tax the citizens or otherwise raise additional
funds to make any regular coupon payments and refund the principal
when the bonds mature.
Barometer
of the economy
At the stock
exchange, share prices rise and fall depending, largely, on market
forces. Share prices tend to rise or remain stable when companies
and the economy in general show signs of stability and growth.
An economic recession, depression,
or financial crisis could eventually lead to a stock market crash.
Therefore the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy.
Major
stock exchanges
Twenty
Major Stock Exchanges In The World: Market Capitalization &
Year-to-date Turnover at the end of October 2007
Note 1:
includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn,
Riga and Vilnius Stock Exchanges
Note 2:
latest data available is at the end of June 2007
Note 3:
latest data available is at the end of September 2007
Listing
requirements
Listing requirements
are the set of conditions imposed by a given stock exchange upon
companies that want to be listed on that exchange. Such conditions
sometimes include minimum number of shares outstanding, minimum
market capitalization, and minimum annual income.
Requirements
by stock exchange
Companies
have to meet the requirements of the exchange in order to have
their stocks and shares listed and traded there, but requirements
vary by stock exchange:
- London
Stock Exchange: The main market of the London Stock Exchange has requirements
for a minimum market capitalization (£700,000), three years
of audited financial statements, minimum public float (25 per
cent) and sufficient working capital for at least 12 months
from the date of listing.
- NASDAQ
Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million
shares of stock worth at least $70 million and must have earned
more than $11 million over the last three years ([1]).
- New
York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for example,
a company must have issued at least a million shares of stock
worth $100 million and must have earned more than $10 million
over the last three years ([2]).
- Bombay
Stock Exchange: Bombay Stock Exchange
(BSE) has requirements for a minimum market capitalization of
Rs.250 Million and minimum public float equivalent to Rs.100
Million ([3]).
References
- ROLE OF THE EXCHANGE IN THE
ECONOMY, NAIROBI STOCK EXCHANGE, source: Nairobi Stock Exchange
website, accessed February 2007
- The Role of a Stock Market in a General Equilibrium Model with
Technological Uncertainty, Peter A. Diamond, The American
Economic Review, Vol. 57, No. 4 (Sep., 1967), pp. 759-776,
source: JSTOR website, accessed February
2007
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