Stock exchange

Not to be confused withStack Exchange.

Astock exchange,securities exchange,orbourseis anexchangewherestockbrokersandtraderscan buy and sellsecurities,such assharesofstock,bondsand 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 outcryat a central location such as the floor of the exchange or by using an electronic system to process financial transactions.

TheNew York Stock ExchangeinLower Manhattanis the world's largest stock exchange per totalmarket capitalizationof its listed companies.

To be able to trade asecurityon a particular stock exchange, the security must belistedthere. 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 tobrokerswho are members of the exchange. In recent years, various other trading venues such as electronic communication networks,alternative trading systemsand "dark pools"have taken much of the trading activity away from traditional stock exchanges.

Initial public offeringsof stocks and bonds to investors is done in theprimary marketand subsequent trading is done in thesecondary market.A stock exchange is often the most important component of astock market.Supply and demand in stock markets are driven by various factors that, as in allfree markets,affect the price of stocks (seestock valuation).

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 exchangeorover-the-counter.This is the usual way thatderivativesand bonds are traded. Increasingly, stock exchanges are part of a global securities market. Stock exchanges also serve an economic function in providing liquidity toshareholdersin 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.

History

The beginnings of lending were in Italy in the late Middle Ages. In the 1300s, Venetian lenders would carry slates with information on the various issues for sale and meet with clients, much like a broker does today. Venetian merchants introduced the principle of exchanging debts between moneylenders; 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. 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,Habsburg(Austrian) emperorFrederick IIrepulsed advances by MongolBatu Kahn(Golden Horde) in 1241. There is little consensus among scholars as to when corporatestockwas first traded. Some view the key event as theDutch East India Company's founding in 1602,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 Vegaand theAmsterdam Stock Exchangeis often considered the oldest "modern" securities market in the world.On the other hand, economistUlrike Malmendierof theUniversity of California at Berkeleyargues that a share market existed as far back asancient Rome,that derives fromEtruscan"Argentari". In theRoman Republic,which existed for centuries before theEmpirewas founded, there weresocietates publicanorum,organizations of contractors or leaseholders who performed temple-building and other services for the government. 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 hadpartesor 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. Thesocietasdeclined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state.

Tradablebondsas a commonly used type of security were a more recent innovation, spearheaded by the Italian city-states of the latemedievaland earlyRenaissanceperiods.

A 17th-century engraving depicting the Amsterdam Stock Exchange

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 Confusionsexplained the workings of the city'sstock market.It was the earliest book aboutstock tradingand inner workings of a stock market, taking the form of a dialogue between a merchant, ashareholderand 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.

London Stock Exchangein 1810

In England, the DutchKing William IIIsought to modernize the kingdom's finances to pay for its wars, and thus the first government bonds were issued in 1693 and theBank of Englandwas set up the following year. Soon thereafter, Englishjoint-stock companiesbegan going public.

London's first stockbrokers, however, were barred from the old commercial center known as the Royal Exchange, reportedly because of their rude manners. 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.

18th century

One of history's greatestfinancial bubblesoccurred 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. 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".

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 Exchangeopened under aPlatanus occidentalis(buttonwood tree) inNew York City,as 24 stockbrokers signed theButtonwood Agreement,agreeing to trade five securities under that buttonwood tree.

19th century onwards

The New Oriental Bank and Share Market, Bombay (nowMumbai) in 1875 acting asBombay Stock Exchange

Bombay Stock Exchange was started by Premchand Roychand in 1875.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.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.

The Bombay Stock Exchange continued to operate out of a building near theTown Halluntil 1928. The present site nearHorniman Circlewas 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 Streetin 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 Governmentunder the Securities Contracts Regulation Act. Construction of the present building, thePhiroze Jeejeebhoy TowersatDalal 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 SENSEXindex, 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 tradingplatform 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.

Roles

New York Stock ExchangeinNew York City,US, is the largest stock exchange in the world.

NasdaqinNew York City,US, is the second-largest stock exchange in the world.

Shanghai Stock ExchangeinShanghai,China, is third-largest stock exchange in the world.

Registered building ofEuronextinAmsterdam,Netherlands, for theEuropean Unionis the fourth-largest stock exchange in the world.

Tokyo Stock ExchangeinTokyo,Japan, is the fifth-largest stock exchange in the world and second-largest in Asia.

Shenzhen Stock ExchangeinShenzhen,China, is the seventh-largest stock exchange in the world, fourth-largest in Asia and second-largest in China.

London Stock ExchangeinLondon,UK, is the eighth-largest stock exchange in the world, largest non-EU European Stock Exchange and second largest in Europe.

Bombay Stock ExchangeinMumbai,India, is the ninth-largest stock exchange in the world, oldest and fifth-largest in Asia, largest in India. It is the fastest stock exchange in the world.

National Stock ExchangeinMumbai,India, is the tenth-largest stock exchange in the world, sixth-largest in Asia and second-largest in India.

Australian Securities ExchangeinSydney,Australia, is the largest stock exchange in Oceania.

B3inSao Paulo,Brazil, is the largest stock exchange in South America.

TheJohannesburg Stock ExchangeinJohannesburg,South Africa, is the largest stock exchange in Africa.

Stock exchanges have multiple roles in the economy. This may include the following:

Raising capital for businesses

Besides the borrowing capacity provided to an individual or firm by thebanking system,in the form ofcreditor a loan, a stock exchange providescompanieswith the facility to raisecapitalfor expansion through sellingsharesto the investing public.

Capital intensivecompanies, particularlyhigh techcompanies, 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. 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 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 publicin 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 indexestracking 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).

Research and Development limited partnerships

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. In order for a partnership to be of interest to investors today, thecash on cash returnmust be high enough to entice investors.

Venture capital

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).

Corporate partners

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.

Mobilizing savings for investment

When people draw their savings and invest in shares (through aninitial public offeringor theseasoned equity offeringof an already listed company), it usually leads torationalallocation of resources because funds, which could have been consumed, or kept in idledepositswith 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 higherproductivitylevels of firms.

Facilitating acquisitions

Companies view acquisitions as an opportunity to expandproduct lines,increase distribution channels, hedge againstvolatility,increase theirmarket share,or acquire other necessary businessassets.Atakeover bidormergers and acquisitionsthrough thestock marketis one of the simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing

Both casual and professionalstock investors,as large asinstitutional investorsor as small as an ordinarymiddle-class family,throughdividendsandstock priceincreases that may result incapital gains,share in the wealth of profitable businesses. Unprofitable and troubled businesses may result incapital lossesfor shareholders.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve management standards andefficiencyto 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).

Despite this claim, some well-documented cases are known where it is alleged that there has been considerable slippage incorporate governanceon the part of some public companies, particularly in the cases ofaccounting scandals.The policies that led to thedot-com bubblein the late 1990s and thesubprime mortgage crisisin 2007–08 are also examples of corporate mismanagement. The mismanagement of companies such asPets.com(2000),Enron(2001),One.Tel(2001),Sunbeam Products(2001),Webvan(2001),Adelphia Communications Corporation(2002),MCI WorldCom(2002),Parmalat(2003),American International Group(2008),Bear Stearns(2008),Lehman Brothers(2008),General Motors(2009) andSatyam Computer Services(2009) all received plenty of media attention.

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 investorstend 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.

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 ofsecuritiesknown 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.

Barometer of the economy

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 crisiscould eventually lead to astock market crash.Therefore, the movement of share prices and in general of thestock indexescan be an indicator of the general trend in the economy.

Listing requirements

Each stock exchange imposes its ownlisting requirementsupon 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.

Examples of listing requirements

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.
• NASDAQ Stock Exchange:NASDAQrequires 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.
• London Stock Exchange:the main market of theLondon Stock Exchangerequires a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25%) and sufficientworking capitalfor 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).

Ownership

Stock exchanges originated asmutual organizations,owned by its member stockbrokers. However, the major stock exchanges havedemutualized,where the members sell their shares in aninitial public offering.In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples areAustralian Securities Exchange(1998),Euronext(merged with New York Stock Exchange),NASDAQ(2002),Bursa Malaysia(2004), theNew York Stock Exchange(2005),Bolsas y Mercados Españoles,and theSão Paulo Stock Exchange(2007).

TheShenzhen Stock ExchangeandShanghai Stock Exchangecan be characterized as quasi-state institutions insofar as they were created by government bodies in China and their leading personnel are directly appointed by theChina Securities Regulatory Commission.

Another example isTashkent Stock Exchangeestablished 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.

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.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.

Other types of exchanges

In the 19th century, exchanges were opened to tradeforward contractsoncommodities.Exchange traded forward contracts are calledfutures contracts.Thesecommodity marketslater started offering future contracts on other products, such as interest rates and shares, as well asoptionscontracts. They are now generally known asfutures exchanges.

See also

• Auction
• Asset allocation
• Capital market
• Commodities exchange
• Corporate governance
• Diversification (finance)
• Federation of Euro-Asian Stock Exchanges
• Financial regulation
• Financial risk management
• Histoire des bourses de valeurs(French)
• International Organization of Securities Commissions
• Securities market participants (United States)
• Stag profit
• Stock market crash
• Stock market bubble
• Stock exchanges for developing countries
• Stock market data systems
• Standard deviation
• Risk management
• World Federation of Exchanges

Lists:

• List of stock exchanges
• List of European stock exchanges
• List of stock exchanges in the Americas
• List of African stock exchanges
• List of stock exchanges in Western Asia
• List of South Asian stock exchanges
• List of East Asian stock exchanges
• List of Southeast Asian stock exchanges
• List of stock exchanges in Oceania
• List of countries without a stock exchange
• List of stock market indices
• List of stock market crashes and bear markets
• List of financial regulatory authorities by country
• List of Swiss financial market legislation

External links

• Stock exchangeatCurlie