Some One's blog: October 2008

A stock exchange, share market or bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities as well as other financial instruments and capital events including the payment of income and dividends. The securities traded on a stock exchange include: shares issued by companies, unit trusts and other pooled investment products and bonds. To be able to trade a security on a certain stock exchange, it has to be listed there. Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global market for securities.

History of stock exchanges

In 11th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th centuryBruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.

House Ter Beurze in Bruges

However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent andAmsterdam.

In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke.

The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London.

The role of stock exchanges

Stock exchanges have multiple roles in the economy, this may include the following:^[1]

Raising capital for businesses

The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investingpublic

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels and firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through thestock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Redistribution of wealth

Stocks exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividendsand stock price increases that may result in capital gains, will share in the wealth of profitable businesses.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve on their management standards andefficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, 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), Fannie Mae (2008), Freddie Mac (2008), Lehman Brothers (2008), were among the most widely scrutinized by the media.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, orfinancial crisis could eventually lead to a stock 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.

Major stock exchanges

Twenty Major Stock Exchanges In The World: Market Capitalization & Year-to-date Turnover at the end of October 2007

Region	Stock Exchange	Market Value (trillions of US dollars)	Total Share Turnover (trillions of US dollars)
Africa	JSE Securities Exchange	$0.940	$0.349
Americas	NASDAQ	$4.39	$12.4
Americas	São Paulo Stock Exchange	$1.40	$0.476
Americas	Toronto Stock Exchange	$2.29	$1.36
Americas/Europe	NYSE Euronext	$20.7	$28.7
Asia-Pacific	Australian Securities Exchange	$1.45³	$1.00³
South Asia	Bombay Stock Exchange	$1.61	$0.263
Asia-Pacific	Hong Kong Stock Exchange	$2.97	$1.70
Asia-Pacific	Korea Exchange	$1.26	$1.66
South Asia	National Stock Exchange of India	$1.46	$0.564
Asia-Pacific	Shanghai Stock Exchange	$3.02	$3.56
Asia-Pacific	Shenzhen Stock Exchange	$0.741	$1.86
Asia-Pacific	Tokyo Stock Exchange	$4.63	$5.45
Europe	Frankfurt Stock Exchange (Deutsche Börse)	$2.12	$3.64
Europe	London Stock Exchange	$4.21	$9.14
Europe	Madrid Stock Exchange (Bolsas y Mercados Españoles)	$1.83	$2.49
Europe	Milan Stock Exchange (Borsa Italiana)	$1.13	$1.98
Europe	Moscow Interbank Currency Exchange (MICEX)	$0.965²	$0.488²
Europe	Nordic Stock Exchange Group OMX¹	$1.38	$1.60
Europe	Swiss Exchange	$1.33	$1.58

Note 1: includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges
Note 2: latest data available is at the end of June 2007
Note 3: latest data available is at the end of September 2007

Sources: World Federation of Exchanges - Statistics/Monthly
Remarks: There are 2 pending major mergers: NASDAQ with OMX; and London Stock Exchange with Milan Stock Exchange