Astock exchange,securities exchange, orbourse is anexchange wherestockbrokers andtraders can buy and sellsecurities, such asshares ofstock,bonds and otherfinancial instruments. Stock exchanges may also provide facilities for the issue and redemption of such securities and instruments and capital events including the payment of income anddividends. Securities traded on a stock exchange include stock issued bylisted companies,unit trusts,derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions viaopen outcry at a central location such as the floor of the exchange or by using an electronic system to process financial transactions.[2]
To be able to trade asecurity on a particular stock exchange, the security must belisted there. Usually, there is a central location for record keeping, but trade is increasingly less linked to a physical place as modern markets useelectronic communication networks, which give them advantages of increased speed and reduced cost of transactions. Trade on an exchange is restricted tobrokers who are members of the exchange. In recent years, various other trading venues such as electronic communication networks,alternative trading systems and "dark pools" have taken much of the trading activity away from traditional stock exchanges.[3]
There is usually no obligation for stock to be issued through the stock exchange itself, nor must stock be subsequently traded on an exchange. Such trading may beoff-exchange orover-the-counter. This is the usual way thatderivatives and bonds are traded. Increasingly, stock exchanges are part of a global securities market. Stock exchanges also serve an economic function in providing liquidity toshareholders in providing an efficient means of disposing of shares. In recent years, as the ease and speed of exchanging stocks over digital platforms has increased, volatility in the day-to-day market has increased, too.
The beginnings of lending were in Italy in the late Middle Ages. In the 14th century, Venetian lenders would carry slates with information on the various issues for sale and meet with clients, much like a broker does today.[4] Venetian merchants introduced the principle of exchanging debts betweenmoneylenders; a lender looking to unload a high-risk, high-interest loan might exchange it for a different loan with another lender. These lenders also bought government debt issues.[5] As the natural evolution of their business continued, the lenders began to sell debt issues to the first individual investors. The Venetians were the leaders in the field and the first to start trading securities from other governments, yet did not embark on private trade with India. Nor did the Italians connect on land with the ChineseSilk Road. Along the potential overland trade route, Holy Roman EmperorFrederick II repulsed advances by MongolBatu Kahn (Golden Horde) in 1241.[6] There is little consensus among scholars as to when corporatestock was first traded. Some view the key event as theDutch East India Company's founding in 1602,[7] while others point to much earlier developments (Bruges, Antwerp in 1531 and in Lyon in 1548). The first book in history of securities exchange, the Confusion of Confusions, was written by the Dutch-Jewish traderJoseph de la Vega and theAmsterdam Stock Exchange is often considered the oldest "modern" securities market in the world.[8] On the other hand, economistUlrike Malmendier of theUniversity of California at Berkeley argues that a share market existed as far back asancient Rome, that derives fromEtruscan "Argentari".[9] In theRoman Republic, which existed for centuries before theEmpire was founded, there weresocietates publicanorum, organizations of contractors or leaseholders who performed temple-building and other services for the government.[10] One such service was the feeding of geese on the Capitoline Hill as a reward to the birds after their honking warned of a Gallic invasion in 390 B.C. Participants in such organizations hadpartes or shares, a concept mentioned various times by the statesman and oratorCicero. In one speech, Cicero mentions "shares that had a very high price at the time". Such evidence, in Malmendier's view, suggests the instruments were tradable, with fluctuating values based on an organization's success. Thesocietas declined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state.[10]
Tradablebonds as a commonly used type of security were a more recent innovation, spearheaded by the Italian city-states of the latemedieval and earlyRenaissance periods.[11]
Joseph de la Vega, also known as Joseph Penso de la Vega and by other variations of his name, was an Amsterdam trader from a Spanish Jewish family and a prolific writer as well as a successful businessman in 17th-century Amsterdam. His 1688 bookConfusion of Confusions[12] explained the workings of the city'sstock market. It was the earliest book aboutstock trading and inner workings of a stock market, taking the form of a dialogue between a merchant, ashareholder and a philosopher, the book described a market that was sophisticated but also prone to excesses, and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment.
In England, London's first stockbrokers were barred from the old commercial center known as the Royal Exchange, reportedly because of their rude manners, in the late 17th century. Instead, the new trade was conducted from coffee houses alongExchange Alley. By 1698, a broker named John Castaing, operating out ofJonathan's Coffee House, was posting regular lists of stock and commodity prices. Those lists mark the beginning of theLondon Stock Exchange.[13]
One of history's greatestfinancial bubbles occurred around 1720. At the center of it were theSouth Sea Company, set up in 1711 to conduct English trade with South America, and theMississippi Company, focused on commerce with France's Louisiana colony and touted by transplanted Scottish financierJohn Law, who was acting in effect as France's central banker. Investors snapped up shares in both, and whatever else was available.[14] In 1720, at the height of the mania, there was even an offering of "a company for carrying out an undertaking of great advantage, but nobody to know what it is".[15]
By the end of that same year, share prices had started collapsing, as it became clear that expectations of imminent wealth from the Americas were overblown. In London, Parliament passed theBubble Act, which stated that only royally chartered companies could issue public shares. In Paris, Law was stripped of office and fled the country. Stock trading was more limited and subdued in subsequent decades. Yet the market survived, and by the 1790s shares were being traded in the young United States. On May 17, 1792, theNew York Stock Exchange opened under aPlatanus occidentalis (buttonwood tree) inNew York City, as 24 stockbrokers signed theButtonwood Agreement, agreeing to trade five securities under that buttonwood tree.[16]
Bombay Stock Exchange was started by Premchand Roychand in 1875.[17] While BSE Limited is now synonymous with Dalal Street, it was not always so. In the 1850s, five stock brokers gathered together under a Banyan tree in front of Mumbai Town Hall, where Horniman Circle is now situated.[18] A decade later, the brokers moved their location to another leafy setting, this time under banyan trees at the junction of Meadows Street and what was then called Esplanade Road, now Mahatma Gandhi Road. With a rapid increase in the number of brokers, they had to shift places repeatedly. At last, in 1874, the brokers found a permanent location, the one that they could call their own. The brokers group became an official organization known as "The Native Share & Stock Brokers Association" in 1875.[19]
The Bombay Stock Exchange continued to operate out of a building near theTown Hall until 1928. The present site nearHorniman Circle was acquired by the exchange in 1928, and a building was constructed and occupied in 1930. The street on which the site is located came to be calledDalal Street in Hindi (meaning "Broker Street") due to the location of the exchange.
On 31 August 1957, the BSE became the first stock exchange to be recognized by theIndian Government under the Securities Contracts Regulation Act. Construction of the present building, thePhiroze Jeejeebhoy Towers atDalal Street,Fort area, began in the late 1970s and was completed and occupied by the BSE in 1980. Initially named theBSE Towers, the name of the building was changed soon after occupation, in memory of SirPhiroze Jamshedji Jeejeebhoy, chairman of the BSE since 1966, following his death.
In 1986, the BSE developed the S&PBSE SENSEX index, giving the BSE a means to measure the overall performance of the exchange. In 2000, the BSE used this index to open its derivatives market, trading S&P BSE SENSEX futures contracts. The development of S&P BSE SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform.
Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system developed byCmc ltd. in 1995. It took the exchange only 50 days to make this transition. This automated,screen-based trading platform called BSE On-Line Trading (BOLT) had a capacity of 8 million orders per day. Now BSE has raised capital by issuing shares and as on 3 May 2017 the BSE share which is traded in NSE only closed with ₹999.[20]
Besides the borrowing capacity provided to an individual or firm by thebanking system, in the form ofcredit or a loan, a stock exchange providescompanies with the facility to raisecapital for expansion through sellingshares to the investing public.[22]
Capital intensive companies, particularlyhigh tech companies, typically need to raise high volumes of capital in their early stages. For this reason, the public market provided by the stock exchanges has been one of the most important funding sources for many capital intensivestartups. In the 1990s and early 2000s, hi-tech listed companies experienced a boom and bust in the world's major stock exchanges.[23] Since then, it has been much more demanding for the high-tech entrepreneur to take his/her company public, unless either the company is already generating sales and earnings, or the company has demonstrated credibility and potential from successful outcomes: clinical trials, market research, patent registrations, etc. This shift in market expectations has led to an increased reliance on private equity and venture capital funding in the early stages of high-tech companies.[24] This is quite different from the situation of the 1990s to early-2000s period, when a number of companies (particularly Internet boom and biotechnology companies)went public in the most prominent stock exchanges around the world in the total absence of sales, earnings, or any type of well-documented promising outcome. Though it is not as common, it still happens that highly speculative and financially unpredictable hi-tech startups are listed for the first time in a major stock exchange. Additionally, there are smaller, specialized entry markets for these kind of companies withstock indexes tracking their performance (examples include theAlternext,CAC Small,SDAX,TecDAX).
Alternatives to stock exchanges for raising capital
Alternative investment funds refer to funds that includehedge funds, venture capital, private equity, angel funds, real estate, commodities, collectibles, structured products, etc. Alternative investment funds are an alternative to traditional investment options (stocks, bonds, and cash).
Companies have also raised significant amounts of capital throughR&Dlimited partnerships. Tax law changes that were enacted in 1987 in the United States changed the tax deductibility of investments in R&D limited partnerships.[25] In order for a partnership to be of interest to investors today, thecash on cash return must be high enough to entice investors.
A general source of capital for startup companies has beenventure capital. This source remains largely available today, but the maximum statistical amount that the venture company firms in aggregate will invest in any one company is not limitless (it was approximately $15 million in 2001 for a biotechnology company).[26]
Another alternative source of cash for a private company is a corporate partner, usually an established multinational company, which provides capital for the smaller company in return for marketing rights, patent rights, or equity. Corporate partnerships have been used successfully in a large number of cases.
When people draw their savings and invest in shares (through aninitial public offering or theseasoned equity offering of an already listed company), it usually leads torational allocation of resources because funds, which could have been consumed, or kept in idledeposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higherproductivity levels of firms.
By going public and listing on a stock exchange, companies gain access to a broader pool of investors, which can provide the necessary funds for expansion, research and development, and other growth initiatives. Additionally, being listed on a stock exchange enhances a company's visibility and credibility, making it more attractive to potential partners, customers, and employees. According to a report by theWorld Federation of Exchanges (WFE), stock exchanges contribute to economic growth by enabling companies to access long-term capital, thereby fostering innovation and job creation.[27]
While stock exchanges are not designed to be platforms for the redistribution of wealth,[28] they play a significant role in allowing both casual and professional stock investors to partake in the wealth generated by profitable businesses. This is achieved through the distribution of dividends and the potential for stock price increases leading to capital gains. As a result, individuals who invest in stocks have the opportunity to share in the prosperity of successful companies,[29] effectively participating in a form of wealth redistribution through their investment activities. Thus, while not the primary purpose of stock exchanges, the opportunity for individuals to benefit from the success of businesses can be seen as a form of wealthredistribution within the financial markets.
By having a wide and varied scope of owners, companies generally tend to improve management standards andefficiency to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. This improvement can be attributed in some cases to the price mechanism exerted through shares of stock, wherein the price of the stock falls when management is considered poor (making the firm vulnerable to a takeover by new management) or rises when management is doing well (making the firm less vulnerable to a takeover). In addition, publicly listed shares are subject to greater transparency so that investors can make informed decisions about a purchase. 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 thanprivately held companies (those companies where shares are not publicly traded, often owned by the company founders, their families and heirs, or otherwise by a small group of investors).[30]
Many banks and companies worldwide utilize securities identification numbers (ISIN) to identify, uniquely, their stocks, bonds and other securities. Adding an ISIN code helps to distinctly identify securities and the ISIN system is used worldwide by funds, companies, and governments.
However, when poor financial, ethical or managerial records become public,stock investors tend to lose money as the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams.
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 as minimum investment amounts are minimal. Therefore, the stock exchange provides the opportunity for small investors to own shares of the same companies as large investors.
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors as minimum investment amounts are minimal. 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 to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category ofsecurities known asbonds. 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 bonds can obviate, in the short term, direct taxation of citizens to finance development—though by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.
At the stock exchange, share prices rise and decreases depending, largely, on economic forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. Arecession,depression, orfinancial crisis could eventually lead to astock market crash. Therefore, the movement of share prices and in general of thestock indexes can be an indicator of the general trend in the economy.
Stock exchanges offer employment opportunities to various individuals such asjobbers and other members who perform activities within the stock exchange. This makes the stock exchange a source of employment, not only for investors but also for the members and their employees. The diverse range of roles within the stock exchange, including trading, analysis, compliance, and administrative functions, creates an ecosystem of employment opportunities that support the operations and functions of the exchange. Additionally, the stock exchange's role in facilitating capital formation and investment in businesses also indirectly contributes to job creation and economic growth, making it a significant player in the employment landscape.[31]
The stock exchange plays a role in regulating companies by exerting a significant influence on their management practices.[32][27] To be listed on a stock exchange, a company is required to adhere to a set of rules and regulations established by the exchange itself. These regulations serve as a framework for corporate governance, financial transparency, and accountability, thereby ensuring that listed companies operate in a manner that is conducive to investor confidence and market stability. By imposing these standards, stock exchanges contribute to the overall integrity and reliability of the financial markets, fostering an environment where companies are held accountable for their actions and decisions, ultimately benefiting both investors and the broader economy.
Each stock exchange imposes its ownlisting requirements upon companies that want to be listed on that exchange. Such conditions may include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.
The listing requirements imposed by some stock exchanges include:
New York Stock Exchange: theNew York Stock Exchange (NYSE) requires a company to have issued at least 1.1 million shares of stock worth $40 million and must have earned more than $10 million over the last three years.[33]
NASDAQ Stock Exchange:NASDAQ requires a company to 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.[34]
London Stock Exchange: the main market of theLondon Stock Exchange requires a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25%) and sufficientworking capital for at least 12 months from the date of listing.
Bombay Stock Exchange:Bombay Stock Exchange (BSE) requires a minimum market capitalization of₹250 million (US$3.0 million) and minimum public float equivalent to₹100 million (US$1.2 million).[35]
The Shanghai Stock Exchange (SSE): To be eligible for an initial public offering (IPO) onthe Shanghai Stock Exchange SSE, a company must meet certain criteria such as minimum market capitalization, a minimum net profit, and a minimum number of shareholders. Also, the company’s total share capital must not be less than RMB 30 million. Companies must also submit financial reports and undergo a review by theCSRC.[36]
Australian Securities Exchange in Sydney:Australia Securities Exchange in Sydney requires a company to meet the Profit Test by demonstrating either of the following: A$1 million aggregated profit from continuing operations over the past 3 years or A$500,000 consolidated profit from continuing operations over the last 12 months. Alternatively, a company can meet the Assets Test by fulfilling one of the following criteria: A$4 million net tangible assets or A$15 million market capitalization.[37][38]
Another example isTashkent Stock Exchange established in 1994, three years after the collapse of the Soviet Union, mainly state-owned but has a form of a public corporation (joint-stock company).Korea Exchange (KRX) owns 25% less one share of the Tashkent Stock Exchange.[39]
In 2018, there were 15 licensed stock exchanges in the United States, of which 13 actively traded securities. All of these exchanges were owned by three publicly traded multinational companies,Intercontinental Exchange,Nasdaq, Inc., andCboe Global Markets, except one,IEX.[40][41] In 2019, a group of financial corporations announced plans to open a members owned exchange,MEMX, an ownership structure similar to the mutual organizations of earlier exchanges.[42][40]
^Stringham, Edward Peter; Curott, Nicholas A.:On the Origins of Stock Markets [Part IV:Institutions and Organizations; Chapter 14], pp. 324–344, inThe Oxford Handbook of Austrian Economics, edited byPeter J. Boettke and Christopher J. Coyne. (Oxford University Press, 2015,ISBN978-0199811762).Edward P. Stringham & Nicholas A. Curott: "Business ventures with multiple shareholders became popular withcommenda contracts in medieval Italy (Greif, 2006, p. 286), andMalmendier (2009) provides evidence that shareholder companies date back to ancient Rome. Yet the title of the world's first stock market deservedly goes to that of seventeenth-century Amsterdam, where an active secondary market in company shares emerged. The two major companies were theDutch East India Company and theDutch West India Company, founded in 1602 and 1621. Other companies existed, but they were not as large and constituted a small portion of the stock market (Israel [1989] 1991, 109–112; Dehing and 't Hart 1997, 54; dela Vega [1688] 1996, 173)."
^De la Vega, Joseph,Confusion de Confusiones (1688),Portions Descriptive of the Amsterdam Stock Exchange, introduction by Hermann Kellenbenz, Baker Library, Harvard Graduate School of Business Administration (1957)
^Diamond, Peter A. (1967). "The Role of a Stock Market in a General Equilibrium Model with Technological Uncertainty".American Economic Review.57 (4):759–776.JSTOR1815367.
.jpg)
_1612_Stadsarchief_Amsterdam_010001000620.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
