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From Wikipedia, the free encyclopedia
A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion at the beginning of October 2008.[1]The total world derivatives market has been estimated at about $791 trillion face or nominal value,[2] 11 times the size of the entire world economy.[3] The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is theNew York Stock Exchange (NYSE). In Canada, the largest stock market is the Toronto Stock Exchange. Major European examples of stock exchanges include the Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Börse (Frankfurt Stock Exchange). In Africa, examples includeNigerian Stock Exchange, JSE Limited, etc. Asian examples include the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such exchanges as the BM&F Bovespa and the BMV.
Market participants include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares. Some studies have suggested that institutional investors and corporations trading in their own shares generally receive higher risk-adjusted returns than retail investors.[4]
Contents[hide] |
[edit]Trading
Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professionalat a stock exchange, who executes the order of buying or selling.
Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.
Actual trades are based on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place, on a first-come-first-served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.
The New York Stock Exchange(NYSE) is a physical exchange, also referred to as a listedexchange – only stocks listed with the exchange may be traded, with a hybrid market for placing orders both electronically and manually on the trading floor. Orders executed on the trading floor enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place—in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.[5]
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.[6]
Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions.
[edit]Market participants
Market participants include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares. Some studies have suggested that institutional investors and corporations trading in their own shares generally receive higher risk-adjusted returns than retail investors.[7]
A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, usually with long family histories to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, hedge funds, investor groups, banks and various otherfinancial institutions).
The rise of the institutional investor has brought with it some improvements in market operations. There has been a gradual tendency for "fixed" (and exorbitant) fees being reduced for all investors, partly from falling administration costs but also assisted by large institutions challenging brokers' oligopolistic approach to setting standardised fees.
[edit]History
In 12th century France the courretiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Brugescommodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred;[8] the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" 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. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. Italian companies were also the first to issue shares. Companies in England and the Low Countries followed in the 16th century. The Dutch East India Company (founded in 1602) was the first joint-stock company to get a fixed capital stock and as a result, continuous trade in company stock emerged on the Amsterdam Exchange. Soon thereafter, a lively trade in variousderivatives, among which options and repos, emerged on the Amsterdam market. Dutch traders also pioneered short selling - a practice which was banned by the Dutch authorities as early as 1610.[9]
There are now stock markets in virtually every developed and most developing economies, with the world's largest markets being in the United States, United Kingdom, Japan, India, China, Canada, Germany (Frankfurt Stock Exchange), France, South Korea and the Netherlands.[10]
[edit]Importance of stock market
[edit]Function and purpose
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional financial capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange affords the investors gives them the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.[citation needed] Some companies actively increase liquidity by trading in their own shares.[11][12]
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An economy where the stock market is on the rise is considered to be an up-and-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development.[citation needed]
Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'être of central banks.[citation needed]
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.[citation needed]
The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as possibly employment. In this way the financial system is assumed to contribute to increased prosperity.[citation needed]
[edit]Relation of the stock market to the modern financial system
The financial system in most western countries has undergone a remarkable transformation. One feature of this development isdisintermediation. A portion of the funds involved in saving and financing, flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations. The general public interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process.
Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment is that financial portfolios have gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc.
The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another
[edit]United States S&P stock market returns
(assumes 2% annual dividend)
| Years to December 30 2011 | Average Annual Return % | Average Compounded Annual Return % |
|---|---|---|
| 1 | 2.0 | 2.0 |
| 3 | 14.3 | 8.1 |
| 5 | 2.3 | 4.4 |
| 10 | 5.1 | 3.9 |
| 15 | 7.7 | 3.6 |
| 20 | 9.6 | 4.6 |
| 30 | 11.7 | 6.2 |
| 40 | 10.2 | 7.0 |
| 50 | 9.3 | 7.3 |
| 60 | 10.5 | 7.5 |
[edit]The behavior of the stock market
From experience we know that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets.) Over-reactions may occur—so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. Economists continue to debate whether financial markets are 'generally' efficient.
According to one interpretation of the efficient-market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpoint—known as 'hard' EMH—also predicts that little or no trading should take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge.) The 'hard'efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when theDow Jones index plummeted 22.6 percent—the largest-ever one-day fall in the United States.[14]
This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a generally agreed upon definite cause: a thorough search failed to detect any'reasonable' development that might have accounted for the crash. (But note that such events are predicted to occur strictly by chance, although very rarely.) It seems also to be the case more generally that many price movements (beyond that which are predicted to occur 'randomly') are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this.[14]
However, a 'soft' EMH has emerged which does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from any momentary market 'inefficiencies'. Moreover, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact. But the best explanation seems to be that the distribution of stock market prices is non-Gaussian (in which case EMH, in any of its current forms, would not be strictly applicable).[15][16]
Other research has shown that psychological factors may result in exaggerated (statistically anomalous) stock price movements (contrary to EMH which assumes such behaviors 'cancel out'). Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.[17]
Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.
In one paper the authors draw an analogy with gambling.[18] In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically.
The stock market, as with any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the 1987 crash, less than 1 percent of the analyst's recommendations had been to sell (and even during the 2000–2002 bear market, the average did not rise above 5 %). In the run up to 2000, the media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000–2002 bear market, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)
[edit]Irrational behavior
Sometimes, the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the fundamental value of securities itself. But, this may be more apparent than real, since often such news has been anticipated, and a counterreaction may occur if the news is better (or worse) than expected. Therefore, the stock market may be swayed in either direction by press releases, rumors, euphoria and mass panic; but generally only briefly, as more experienced investors (especially the hedge funds) quickly rally to take advantage of even the slightest, momentary hysteria.
Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market behavior difficult to predict. Emotions can drive prices up and down, people are generally not as rational as they think, and the reasons for buying and selling are generally obscure. Behaviorists argue that investors often behave 'irrationally' when making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money.[19] However, the whole notion of EMH is that these non-rational reactions to information cancel out, leaving the prices of stocks rationally determined.
The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11 percent, this occurred on October 13, 2008.[20]
[edit]Crashes
Main article: Stock market crash
Further information: List of stock market crashes
 | The examples and perspective in this section may not represent a worldwide view of the subject. (March 2009) |
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A stock market crash is often defined as a sharp dip inshare prices of equities listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is also due to panic and investing public's loss of confidence. Often, stock market crashes end speculative economic bubbles.
There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing number of people are involved in the stock market, especially since the social security and retirement plans are being increasingly privatized and linked to stocks and bonds and other elements of the market. There have been a number of famous stock market crashes like the Wall Street Crash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000, and the Stock Market Crash of 2008.
One of the most famous stock market crashes started October 24, 1929 on Black Thursday. The Dow Jones Industrial lost 50 % during this stock market crash. It was the beginning of the Great Depression. Another famous crash took place on October 19, 1987 – Black Monday. The crash began in Hong Kong and quickly spread around the world.
By the end of October, stock markets in Hong Kong had fallen 45.5 %%, Australia 41.8 %%, Spain 31 %%, the United Kingdom 26.4 %%, the United States 22.68 %%, and Canada 22.5 %%. Black Monday itself was the largest one-day percentage decline in stock market history – the Dow Jones fell by 22.6 %% in a day. The names “Black Monday” and “Black Tuesday” are also used for October 28–29, 1929, which followed Terrible Thursday—the starting day of the stock market crash in 1929.
The crash in 1987 raised some puzzles-–main news and events did not predict the catastrophe and visible reasons for the collapse were not identified. This event raised questions about many important assumptions of modern economics, namely, the theory of rational human conduct, the theory of market equilibrium and the hypothesis of market efficiency. For some time after the crash, trading in stock exchanges worldwide was halted, since the exchange computers did not perform well owing to enormous quantity of trades being received at one time. This halt in trading allowed the Federal Reserve system and central banks of other countries to take measures to control the spreading of worldwide financial crisis. In the United States the SEC introduced several new measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday.
Since the early 1990's, many of the largest exchanges have adopted electronic 'matching engines' to bring together buyers and sellers, replacing the open outcry system. Electronic trading now accounts for the majority of trading in many developed countries. Computer systems were upgraded in the stock exchanges to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin requirements in an attempt to lower the volatility of common stocks, stock options and the futures market. The New York Stock Exchange and the Chicago Mercantile Exchange introduced the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time. In February 2012, the Investment Industry Regulatory Organization of Canada (IIROC) introduced single-stock circuit breakers.[22]
- New York Stock Exchange (NYSE) circuit breakers[23]
| % drop | time of drop | close trading for |
|---|---|---|
| 10 | before 2 pm | one hour halt |
| 10 | 2 pm – 2:30 pm | half-hour halt |
| 10 | after 2:30 pm | market stays open |
| 20 | before 1 pm | halt for two hours |
| 20 | 1 pm – 2 pm | halt for one hour |
| 20 | after 2 pm | close for the day |
| 30 | any time during day | close for the day |
[edit]Stock market index
Main article: Stock market index
The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
[edit]Derivative instruments
Main article: Derivative (finance)
Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges (which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or traded over-the-counter. As all of these products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical)derivatives market, rather than the (hypothetical) stock market.
[edit]Leveraged strategies
Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sales.
[edit]Short selling
Main article: Short selling
In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime and losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders in illiquid or thinly traded markets to artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets.
[edit]Margin buying
Main article: margin buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50 % for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500).
A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.)
Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim).
[edit]New issuance
Main article: Thomson Reuters league tables
Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8 % increase over the $389 billion raised in 2003.Initial public offerings (IPOs) by US issuers increased 221 % with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333 %, from $ 9 billion to $39 billion.
[edit]Investment strategies
Main article: Stock valuation
 | This section's tone or style may not reflect the encyclopedic tone used on Wikipedia. (November 2011) |
One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified by either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control and diversification.
Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10 % per year, compounded annually, since World War II).
[edit]Taxation
Main article: Capital gains tax
According to much national or state legislation, a large array of fiscal obligations are taxed for capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in particular in the stock exchanges. However, these fiscal obligations may vary from jurisdictions to jurisdictions because, among other reasons, it could be assumed that taxation is already incorporated into thestock price through the different taxes companies pay to the state, or that tax free stock market operations are useful to boost economic growth.[citation needed]
[edit]See also
- Balance sheet
- Dead cat bounce
- List of market opening times
- List of recessions
- List of stock exchanges
- List of stock market indices
- Modeling and analysis of financial markets
- NASDAQ-100
- Securities regulation in the United States
- Slippage (finance)
- Stock market bubble
- Stock market cycles
- Stock market data systems
[edit]References
- ^ "World Equity Market Declines: -$25.9 Trillion". Seeking Alpha. Retrieved 2011-05-31.
- ^ "Quarterly Review Statistical Annex – December 2008". Bis.org. September 7, 2008. Retrieved March 5, 2010.
- ^ "Central Intelligence Agency". Cia.gov. Retrieved 2011-05-31.
- ^ Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed, and Michael Simkovic, The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions(October 2010). Paolo Baffi Centre Research Paper No. 2011-100.
- ^ "What's the difference between a Nasdaq market maker and a NYSE specialist?". Investopedia.com. Retrieved March 5, 2010.
- ^ Ortega, Edgar (2006-12-04). "UBS, Goldman Threaten NYSE, Nasdaq With Rival Stock Markets". Bloomberg.com. Retrieved 2011-05-31.
- ^ Amedeo De Cesari, Susanne Espenlaub, Arif Khurshed, and Michael Simkovic, The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions(October 2010). Paolo Baffi Centre Research Paper No. 2011-100.
- ^ "16de eeuwse traditionele bak- en zandsteenarchitectuurOude Beurs Antwerpen 1 (centrum) / Antwerp foto". Belgiumview.com. Retrieved March 5, 2010.
- ^ "PhD thesis 'The world's first stock exchange'". Retrieved 2011-10-01.
- ^ "World Federation of Exchanges Monthly YTD Data". World-exchanges.org. Retrieved 2011-05-31.
- ^ Cesari, Amedeo De; Espenlaub, Susanne; Khurshed, Arif; Simkovic, Michael (2010). "The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions". Paolo Baffi Centre Research Paper No. 2011-100.SSRN 1884171.
- ^ Simkovic, Michael (2009). "The Effect of Enhanced Disclosure on Open Market Stock Repurchases". Berkeley Business Law Journal 6 (1). SSRN 1117303.
- ^ "No. HS-38. Stock Prices and Yields: 1900 to 2002"(PDF). Retrieved 2011-05-31.
- ^ a b Cutler, D. Poterba, J. & Summers, L. (1991). "Speculative dynamics". Review of Economic Studies 58: 520–546.
- ^ Mandelbrot, Benoit & Hudson, Richard L. (2006). The Misbehavior of Markets: A Fractal View of Financial Turbulence, annot. ed.. Basic Books. ISBN 0-465-04357-7.
- ^ Taleb, Nassim Nicholas (2008). Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets, 2nd ed.. Random House. ISBN 1-4000-6793-6.
- ^ Tversky, A. & Kahneman, D. (1974). "Judgement under uncertainty: heuristics and biases". Science 185 (4157): 1124–1131. doi:10.1126/science.185.4157.1124.PMID 17835457.
- ^ Morris, Stephen; Shin, Hyun Song (1999). "Risk management with interdependent choice". Oxford Review of Economic Policy 15 (3): 52–62. doi:10.1093/oxrep/15.3.52.
- ^ Sergey Perminov, Trendocracy and Stock Market Manipulations (2008, ISBN 978-1-4357-5244-3).
- ^ "News Headlines". Cnbc.com. October 13, 2008. Retrieved March 5, 2010.
- ^ a b c Shiller, Robert (2005). Irrational Exuberance (2d ed.).Princeton University Press. ISBN 0-691-12335-7.
- ^ Completing the Circuit: Canadian Regulation, FIXGlobal, February 2012
- ^ Chris Farrell. "Where are the circuit breakers". Retrieved October 16, 2008.
[edit]Further reading
- Hamilton, W. P. (1922). The Stock Market Baraometer. New York: John Wiley & Sons Inc (1998 reprint). ISBN 0-471-24764-2.
- Preda, Alex (2009). Framing Finance: The Boundaries of Markets and Modern Capitalism. University of Chicago Press. ISBN 978-0-226-67932-7.
[edit]External links
 | Look up stock market in Wiktionary, the free dictionary. |
 | Wikiquote has a collection of quotations related to: Stock market |
Stock exchange
From Wikipedia, the free encyclopedia
| Financial markets |
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| Bond market |
| Stock market |
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| Derivatives market |
| Over-the-counter |
| Foreign exchange |
| Other markets |
| Practical trading |
| Finance series |
A stock exchange is a form of exchange which provides services for stock brokers and traders to tradestocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income anddividends. Securities traded on a stock exchange include shares issued by companies, unit trusts,derivatives, pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced 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. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks (see stock valuation).
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 derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.
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[edit]History
Securities markets took centuries to develop.[1] The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as theDutch East India Company's founding in 1602, while others point to earlier developments. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back as ancient Rome.
In the Roman Republic, which existed for centuries before the Empire was 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 had partes or shares, a concept mentioned various times by the statesman and orator Cicero. 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. The societas declined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state.
Tradable bonds as a commonly used type of security were a more recent innovation, spearheaded by the Italian city-states of the late medieval and early Renaissance periods.
In 1171, the authorities of the Republic of Venice, concerned about their war-depleted treasury, drew a forced loan from the citizenry. Such debt, known as prestiti, paid 5 percent interest per year and had an indefinite maturity date. Initially regarded with suspicion, it came to be seen as a valuable investment that could be bought and sold. The bond market had begun.
From 1262 to 1379, Venice never missed an interest payment, solidifying the credibility of the new instruments. Other Italian city-states such as Florence and Genoa became bond issuers as well, often as a means of paying for warfare. Bonds were traded widely in Italy and beyond, a business facilitated by bankers such as theMedicis.
War between Venice and Genoa resulted in suspension of prestiti interest payments in the early 1380s, and when the market was restored, it was at a lower interest rate. Venice's bonds traded at steep discounts for decades thereafter. Other blows to financial stability resulted from theHundred Years War, which caused monarchs of France and England to default on debts to Italian banks, and the Black Death, which ravaged much of Europe. Still, the idea of debt as a tradable investment endured.
As with bonds, the concept of stock developed gradually. Some scholars place its origins as far back as ancient Rome. Partnership agreements dividing ownership into shares date back at least to the 13th century, again with Italian city-states in the vanguard. Such arrangements, however, typically extended only to a handful of people and were of limited duration, as with shipping partnerships that applied only to a single sea voyage.
The forefront of commercial innovation eventually shifted from Italy to northern Europe. TheHanseatic League, an alliance of mercantile cities such as Bruges and Antwerp, operated counting houses to expedite trade.
By the late 1500s, British merchants were experimenting with joint-stock companies intended to operate on an ongoing basis; one such was the Muscovy Company, which sought to wrest trade with Russia away from Hanseatic dominance. The next big step was inAmsterdam. In 1602, the Dutch East India Company was formed as a joint-stock company with shares that were readily tradable. The stock market had begun.
The Dutch East India Company, formed to build up the spice trade, operated as a colonial ruler in what's now Indonesia and beyond, a purview that included conducting military operations against recalcitrant natives and competing colonial powers. Control of the company was held tightly by its directors, with ordinary shareholders not having much influence on management or even access to the company's accounting statements.
However, shareholders were rewarded well for their investment. The company paid an average dividend of over 16 percent per year from 1602 to 1650. Financial innovation in Amsterdam took many forms. In 1609, investors led by one Isaac Le Maire formed history's first bear syndicate, but their coordinated trading had only a modest impact in driving down share prices, which tended to be robust throughout the 17th century. By the 1620s, the company was expanding its securities issuance with the first use of corporate bonds.
The Dutch West India Company was formed in 1621, bringing a new issuer to the burgeoning securities market. Amsterdam's growth as a financial center survived the tulip mania of the 1630s, in which contracts for the delivery of flower bulbs soared wildly and then crashed. New techniques and instruments proliferated for securities as well as commodities, including options, repos and margin trading.[2]
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 book Confusion of Confusions explained the workings of the city's stock market. It was the earliest book about stock trading, taking the form of a dialogue between a merchant, a shareholder 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.
The year that de la Vega published also brought an event that helped spread financial techniques and talent from Amsterdam to London. This was the "glorious revolution," in which Dutch ruler William of Orange also ascended to England's throne. William sought to modernize England's finances to pay for its wars, and thus the kingdom's first government bonds were issued in 1693 and the Bank of England was set up the following year. Soon thereafter, English joint-stock companies began 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 along Exchange Alley. By 1698, a broker named John Castaing, operating out of Jonathan's Coffee House, was posting regular lists of stock and commodity prices. Those lists mark the beginning of the London Stock Exchange.
One of history's greatest financial bubbles occurred in the next few decades. At the center of it were the South Sea Company, set up in 1711 to conduct English trade with South America, and the Mississippi Company, focused on commerce with France's Louisiana colony and touted by transplanted Scottish financier John 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 were 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. InParis, 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 8 February 1971, NASDAQ, the world's first electronic stock exchange, started its operations.
[edit]Role of stock exchanges
[edit]Raising capital for businesses
The Stock Exchange provide companies with the facility to raise capital for expansion through sellingshares to the investing public.[4]
[edit]Common forms of capital raising
Besides the borrowing capacity provided to an individual or firm by the banking system, in the form ofcredit or a loan, there are four common forms of capital raising used by companies and entrepreneurs. Most of these available options, might be achieved, directly or indirectly, involving a stock exchange.
[edit]Going public
Capital intensive companies, particularly high tech companies, always need to raise high volumes of capital in their early stages. By this reason, the public market provided by the stock exchanges, has been one of the most important funding sources for many capital intensive startups. After the 1990s and early-2000s hi-tech listed companies' boom and bust in the world's major stock exchanges, it has been much more demanding for the high-tech entrepreneur to take his/her company public, unless either the company already has products in the market and is generating sales and earnings, or the company has completed advanced promising clinical trials, earned potentially profitable patents or conducted market research which demonstrated very positive outcomes. 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 and any well-documented promising outcome. Anyway, every year a number of companies, including unknown highly speculative and financially unpredictable hi-tech startups, are listed for the first time in all the major stock exchanges - there are even specialized entry markets for this kind of companies or stock indexes tracking their performance (examples include the Alternext, CAC Small, SDAX, TecDAX, or most of the third market companies).
[edit]Limited partnerships
A number of companies have also raised significant amounts of capital through R&D limited 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, the cash-on-cash return must be high enough to entice investors. As a result, R&D limited partnerships are not a viable means of raising money for most companies, specially hi-tech startups.
[edit]Venture capital
A third usual source of capital for startup companies has been venture 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).[5] At those level, venture capital firms typically become tapped-out because the financial risk to any one partnership becomes too great.
[edit]Corporate partners
A fourth 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.
[edit]Mobilizing savings for investment
When people draw their savings and invest in shares (through a IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promotebusiness activity with benefits for several economic sectors such as agriculture, commerce andindustry, resulting in stronger economic growth and higher productivity levels of firms. Sometimes it is very difficult for the stock investor to determine whether or not the allocation of those funds is in good faith and will be able to generate long-term company growth, without examination of a company'sinternal auditing.
[edit]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 businessassets. 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.
[edit]Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result incapital losses for shareholders.
[edit]Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve managementstandards and efficiency 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 thanprivately 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).
Despite this claim, 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. The dot-com bubble in the late 1990s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel(2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003),American International Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General Motors(2009) and Satyam Computer Services (2009) were among the most widely scrutinized by the media.
However, when poor financial, ethical or managerial records are known by the stock investors, 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.
[edit]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.
[edit]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 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 bonds can obviate the need, in the short term, to directly tax 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.
[edit]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.
[edit]Speculation
Main article: Speculation
The stock exchanges are also fashionable places for speculation. In a financial context, the terms "speculation" and "investment" are actually quite specific. For instance, although the word "investment" is typically used, in a general sense, to mean any act of placing money in a financial vehicle with the intent of producing returns over a period of time, most ventured money—including funds placed in the world's stock markets—is actually not investment but speculation.
[edit]Major stock exchanges
Major Stock Exchanges : Year ended 31 December 2011 [1]
| Rank | Economy | Stock Exchange | Headquarters | Market Capitalization (USDBillions) | Trade Value (USD Billions) |
|---|---|---|---|---|---|
| 1 |  United States
 Europe | NYSE Euronext (US & Europe) | New York City | 14,242 | 20,161 |
| 2 | United States
Europe | NASDAQ OMX (US & North Europe) | New York City | 4,687 | 13,552 |
| 3 |  Japan | Tokyo Stock Exchange | Tokyo | 3,325 | 3,972 |
| 4 |  United Kingdom | London Stock Exchange | London | 3,266 | 2,837 |
| 5 |  China | Shanghai Stock Exchange | Shanghai | 2,357 | 3,658 |
| 6 |  Hong Kong | Hong Kong Stock Exchange | Hong Kong | 2,258 | 1,447 |
| 7 |  Canada | Toronto Stock Exchange | Toronto | 1,912 | 1,542 |
| 8 |  Brazil | BM&F Bovespa | São Paulo | 1,229 | 931 |
| 9 |  Australia | Australian Securities Exchange | Sydney | 1,198 | 1,197 |
| 10 |  Germany | Deutsche Börse | Frankfurt | 1,185 | 1,758 |
| 11 |  Switzerland | SIX Swiss Exchange | Zurich | 1,090 | 887 |
| 12 | China | Shenzhen Stock Exchange | Shenzhen | 1,055 | 2,838 |
| 13 |  Spain | BME Spanish Exchanges | Madrid | 1,031 | 1,226 |
| 14 |  India | Bombay Stock Exchange | Mumbai | 1,007 | 148 |
| 15 |  South Korea | Korea Exchange | Seoul | 996 | 2,029 |
| 16 | India | National Stock Exchange of India | Mumbai | 985 | 589 |
| 17 |  Russia | MICEX-RTS | Moscow | 800 | 514 |
| 18 |  South Africa | JSE Limited | Johannesburg | 789 | 372 |
[edit]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.
[edit]Requirements by stock exchange
Companies must meet an exchange's requirements to have their stocks and shares listed and traded there, but requirements vary by stock exchange:
- New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE) 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.[6]
- 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.[7]
- 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.
- Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of
25 crore (US$4.53 million) and minimum public float equivalent to
[edit]Ownership
Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, 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 are Australian Securities Exchange (1998), Euronext (merged with New York Stock Exchange), NASDAQ (2002), the New York Stock Exchange (2005), Bolsas y Mercados Españoles, and the São Paulo Stock Exchange (2007). The Shenzhen and Shanghai stock exchanges can been characterized as quasi-state institutions insofar as they were created by government bodies in China and their leading personnel are directly appointed by the China Securities Regulatory Commission.
[edit]Other types of exchanges
In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other products, such as interest rates and shares, as well as optionscontracts. They are now generally known as futures exchanges.
[edit]See also
- Auction
- Capital market
- Commodities exchange
- Financial regulation
- International Organization of Securities Commissions
- Shareholder
- Stag profit
- Stock exchanges for developing countries
- Stock investor
- Stock market
- Stock market data systems
Lists:
- List of stock exchanges
- List of stock market indices
- List of financial regulatory authorities by country
- List of Swiss financial market legislation
[edit]References
- ^ Silber, Kenneth (February 2009). "The Earliest Securities Markets". Research magazine 32 (2): 44–47. Retrieved 19 May 2011.
- ^ "PhD thesis - The world's first stock exchange". Retrieved 1 October 2011.
- ^ 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.JSTOR 1815367.
- ^ Gilson, Ronald J.; Black, Bernard S. (1998). "Venture Capital and the Structure of Capital Markets: Banks Versus Stock Markets". Journal of Financial Economics 47: 243–277.doi:10.2139/ssrn.46909.
- ^ STRATEGIC IMPLICATIONS OF ALTERNATIVE SOURCES OF CAPITAL FOR PRIVATE BIOTECHNOLOGY COMPANIE
- ^ http://www.nyse.com/Frameset.html?displayPage=/listed/1022540125610.html
- ^ NASDAQ Corporate -NASDAQ Listing Information
- ^ About Us
[edit]External links
 | Wikimedia Commons has media related to: Stock exchanges |
| Look up bourse or stock exchange in Wiktionary, the free dictionary. |
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