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A stock exchange, securities exchange, or bourse is an exchange where
stockbroker A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stocks and ...

stockbroker
s and traders can buy and sell
securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use the term "security" to refer to any for ...
, such as
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...
of
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...

stock
, bonds and other financial 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 and
dividend A dividend is a distribution of Profit (accounting), profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed ...

dividend
s. Securities traded on a stock exchange include stock issued by listed companies,
unit trust A unit trust is a form of Collective investment scheme, collective investment constituted under a Trust (law), trust deed. A unit trust pools investors' money into a single fund, which is managed by a fund manager. Unit trusts offer access to a ...
s, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions via
open outcry Open outcry is a method of communication between professionals on a stock exchange A stock exchange, securities exchange, or bourse is an Exchange (organized market), exchange where stockbrokers and stock trader, traders can buy and se ...
at a central location such as the floor of the exchange or by using an
electronic trading platform In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products ...
. To be able to trade a security on a certain stock exchange, the security must be listed there. Usually, there is a central location for record keeping, but trade is increasingly less linked to a physical place as modern markets use
electronic communication network An electronic communication network (ECN) is a type of computerized forum or network that facilitates the trading of financial products outside traditional stock exchanges. An ECN is generally an electronic system that widely disseminates orders e ...
s, which give them advantages of increased speed and reduced cost of transactions. Trade on an exchange is restricted to
broker A broker is a person or firm who arranges transactions between a Purchasing, buyer and a sales, seller for a commission (remuneration), commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a :wikt:princip ...
s who are members of the exchange. In recent years, various other trading venues such as electronic communication networks,
alternative trading system Alternative trading system (ATS) is a US and Canadian Financial regulation, regulatory term for a non-exchange trading venue that matches buyers and sellers to find counterparties for transactions. Alternative trading systems are typically regulate ...
s and " dark pools" have taken much of the trading activity away from traditional stock exchanges.
Initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically Underwriting, underwritten by one or mo ...
s of stocks and bonds to investors is done in the
primary market :''"Primary market" may also refer to Art valuation#Primary and secondary markets, a market in art valuation.'' The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the i ...
and subsequent trading is done in the
secondary market The secondary market, also called the aftermarket and follow on public offering, is the financial markets, financial market in which previously issued financial instruments such as stock, Bond (finance), bonds, option (finance), options, and Fut ...
. A stock exchange is often the most important component of a
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...

stock market
. Supply and demand in stock markets are driven by various factors that, as in all
free market In economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the b ...
s, affect the price of stocks (see
stock valuation In financial markets, stock valuation is the method of calculating theoretical values of companies and their share capital, stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and th ...
). 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 be ''off exchange'' or
over-the-counter Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid pres ...
. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global securities market. Stock exchanges also serve an economic function in providing liquidity to
shareholders A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
in providing an efficient means of disposing of shares.


History

The beginnings of the stock exchange 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. The Real Merchants of Venice 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.2 The Venetians were the leaders in the field and the first to start trading securities from other governments.3 There is little consensus among scholars as to when corporate
stock In finance, stock (also capital stock) consists of all the Share (finance), shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which owners ...

stock
was first traded. Some view the key event as the
Dutch East India Company The United East India Company ( nl, Verenigde Oostindische Compagnie, the VOC) was a chartered company established on the 20th March 1602 by the States General of the Netherlands amalgamating existing companies into the first joint-stock ...

Dutch 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 trader
Joseph de la Vega José or Joseph Penso de la Vega, best known as Josseph de la Vega (ca. 1650 — Amsterdam, 13 November, 1692), was a Sephardi Jews, Sephardi Jewish merchant in diamonds, financial expert, moral philosophy, moral philosopher and poet, residing in ...
and the
Amsterdam Stock Exchange Euronext Amsterdam is a stock exchange based in Amsterdam, the Netherlands. Formerly known as the Amsterdam Stock Exchange, it merged on 22 September 2000 with the Brussels Stock Exchange and the Paris Stock Exchange to form Euronext. The reg ...
is often considered the oldest “modern” securities market in the world. On the other hand, economist Ulrike Malmendier of the
University of California at Berkeley The University of California, Berkeley (UC Berkeley, Berkeley, Cal, or California) is a public university, public land-grant university, land-grant research university in Berkeley, California. Established in 1868 as the University of Californi ...
argues that a share market existed as far back as
ancient Rome In modern historiography, ancient Rome refers to Roman civilisation from the founding of the city of Rome in the 8th century BC to the collapse of the Western Roman Empire in the 5th century AD. It encompasses the Roman Kingdom (753–509 ...
, that derives from Etruscan "Argentari". In the
Roman Republic The Roman Republic ( la, Res publica Romana ) was a form of government of Rome and the era of the ancient Rome, classical Roman civilization when it was run through res publica, public Representation (politics), representation of the Roman peo ...

Roman Republic
, which existed for centuries before the
Empire An empire is a "political unit" made up of several territories and peoples, "usually created by conquest, and divided between a dominant center and subordinate peripheries". The center of the empire (sometimes referred to as the metropole) ex ...

Empire
was founded, there were ''societates 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 Marcus Tullius Cicero ( ; ; 3 January 106 BC – 7 December 43 BC) was a Ancient Rome, Roman statesman, lawyer, scholar, philosopher, and Academic skepticism, academic skeptic, who tried to uphold optimate principles during crisis of ...

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 In the history of Europe, the Middle Ages or medieval period lasted approximately from the late 5th to the late 15th centuries, similar to the post-classical period of global history. It began with the fall of the Western Roman Empire ...

medieval
and early
Renaissance The Renaissance ( , ) , from , with the same meanings. is a Periodization, period in History of Europe, European history marking the transition from the Middle Ages to modernity and covering the 15th and 16th centuries, characterized by an e ...

Renaissance
periods.Stringham, Edward Peter; Curott, Nicholas A.: ''On the Origins of Stock Markets'' art IV: ''Institutions and Organizations''; Chapter 14 pp. 324-344, in ''The Oxford Handbook of Austrian Economics'', edited by Peter J. Boettke and Christopher J. Coyne. (Oxford University Press, 2015, ). Edward P. Stringham & Nicholas A. Curott: "Business ventures with multiple shareholders became popular with ''commenda'' contracts in medieval Italy ( Greif, 2006, p. 286), and Malmendier (2009) provides evidence that shareholder companies date back to ancient Rome. Yet the title of the world's first stock market deservedly goes to that of seventeenth-century Amsterdam, where an active secondary market in company shares emerged. The two major companies were the
Dutch East India Company The United East India Company ( nl, Verenigde Oostindische Compagnie, the VOC) was a chartered company established on the 20th March 1602 by the States General of the Netherlands amalgamating existing companies into the first joint-stock ...

Dutch East India Company
and the
Dutch West India Company The Dutch West India Company ( nl, Geoctrooieerde Westindische Compagnie, ''WIC'' or ''GWC''; ; en, Chartered West India Company) was a chartered company of Dutch merchants as well as foreign investors. Among its founders was Willem Usselincx ( ...
, founded in 1602 and 1621. Other companies existed, but they were not as large and constituted a small portion of the stock market (Israel 9891991, 109–112; Dehing and 't Hart 1997, 54; dela Vega 6881996, 173)."
Joseph de la Vega José or Joseph Penso de la Vega, best known as Josseph de la Vega (ca. 1650 — Amsterdam, 13 November, 1692), was a Sephardi Jews, Sephardi Jewish merchant in diamonds, financial expert, moral philosophy, moral philosopher and poet, residing in ...
, 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 A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...

stock market
. It was the earliest book about
stock trading In finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of Production (economics), production, Distribution (economics), distribution, and Consumption ...
and inner workings of a stock market, taking the form of a dialogue between a merchant, a
shareholder A shareholder (in the United States often referred to as stockholder) of a corporation is an individual or legal entity (such as another corporation, a body politic, a Trust law, trust or partnership) that is registered by the corporation as the ...
and a philosopher, the book described a market that was sophisticated but also prone to excesses, and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment. In England,
King William III
King William III
sought to modernize the kingdom's finances to pay for its wars, and thus the first government bonds were issued in 1693 and the
Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker, and still one of the bankers fo ...

Bank of England
was set up the following year. Soon thereafter, English
joint-stock companies A joint-stock company is a business entity in which shares of the company's capital stock, stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their share (finance), shares (certificates ...
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 Exchange Alley or Change Alley is a narrow alley, alleyway connecting shops and coffeehouses in an old neighbourhood of the City of London. It served as a convenient shortcut from the Royal Exchange, London, Royal Exchange on Cornhill, London, C ...
. 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 London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Paul ...
. One of history's greatest financial bubbles occurred around 1720. At the center of it were the
South Sea Company The South Sea Company (officially The Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of the Fishery) was a British joint-stock company founded in Ja ...
, set up in 1711 to conduct English trade with South America, and the
Mississippi Company The Mississippi Company (french: Compagnie du Mississippi; founded 1684, named the Company of the West from 1717, and the Company of the Indies from 1719) was a corporation holding a business monopoly in French colonies in North America and th ...
, 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 had started collapsing, as it became clear that expectations of imminent wealth from the Americas were overblown. In London, Parliament passed the
Bubble Act The Bubble Act 1720 (also Royal Exchange and London Assurance Corporation Act 1719) was an Act of the Parliament of Great Britain The Parliament of Great Britain was formed in May 1707 following the ratification of the Acts of Union by bo ...
, 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, the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City New York, often called New York City or NYC, is the List o ...

New York Stock Exchange
opened under a ''
Platanus occidentalis ''Platanus occidentalis'', also known as American sycamore, American planetree, western plane, occidental plane, buttonwood, and water beech, is a species of ''Platanus'' native to the eastern and central United States, the mountains of northeas ...
'' (buttonwood tree) in
New York City New York, often called New York City or NYC, is the List of United States cities by population, most populous city in the United States. With a 2020 population of 8,804,190 distributed over , New York City is also the L ...

New York City
, as 24 stockbrokers signed the
Buttonwood Agreement The Buttonwood Agreement is the founding document of what is now New York Stock Exchange and is one of the most important financial documents in U.S. history. The agreement organized securities trading in New York City and was signed on May 17, ...
, agreeing to trade five securities under that buttonwood tree. 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 the
Town Hall In local government, a city hall, town hall, civic centre (in the United Kingdom, UK or Australia), guildhall, or a municipal building (in the Philippines), is the chief administration (government), administrative building of a city, tow ...
until 1928. The present site near Horniman Circle was acquired by the exchange in 1928, and a building was constructed and occupied in 1930. The street on which the site is located came to be called ''Dalal Street'' in Hindi (meaning "Broker Street") due to the location of the exchange. On 31 August 1957, the BSE became the first stock exchange to be recognized by the
Indian Government The Government of India (ISO 15919, ISO: ; often abbreviated as GoI), known as the Union Government or Central Government but often simply as the Centre, is the Government, national government of the Republic of India, a federal democracy lo ...
under the Securities Contracts Regulation Act. Construction of the present building, the Phiroze Jeejeebhoy Towers at
Dalal Street
Dalal Street
, Fort area, began in the late 1970s and was completed and occupied by the BSE in 1980. Initially named the ''BSE Towers'', the name of the building was changed soon after occupation, in memory of Sir Phiroze Jamshedji Jeejeebhoy, chairman of the BSE since 1966, following his death. In 1986, the BSE developed the S&P
BSE SENSEX The BSE SENSEX (also known as the S&P Bombay Stock Exchange Sensitive Index or simply SENSEX) is a Capitalization-weighted index, free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the ...
index, giving the BSE a means to measure the overall performance of the exchange. In 2000, the BSE used this index to open its derivatives market, trading S&P BSE SENSEX futures contracts. The development of S&P BSE SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the BSE's trading platform. Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system developed by Cmc ltd. in 1995. It took the exchange only 50 days to make this transition. This automated,
screen-based trading In finance, an electronic trading platform also known as an online trading platform, is a computer software program that can be used to place orders for financial products over a network with a financial intermediary. Various financial products c ...
platform called BSE On-Line Trading (BOLT) had a capacity of 8 million orders per day. Now BSE has raised capital by issuing shares and as on 3 May 2017 the BSE share which is traded in NSE only closed with ₹999.


Roles

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 the
banking system A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Beca ...
, in the form of
credit Credit (from Latin verb ''credit'', meaning "one believes") is the Trust (social sciences), trust which allows one Party (law), party to provide money or resources to another party wherein the second party does not reimburse the first party im ...
or a loan, a stock exchange provides
companies A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared ...

companies
with the facility to raise
capital Capital may refer to: Common uses * Capital city, a municipality of primary status ** List of national capitals, List of national capital cities * Capital letter, an upper-case letter Economics and social sciences * Capital (economics), the dura ...
for expansion through selling
shares In finance, financial markets, a share is a unit of Equity (finance), equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers t ...
to the investing public. Capital intensive companies, particularly
high tech High technology (high tech), also known as advanced technology (advanced tech) or exotechnology, is technology that is at the state of the art, cutting edge: the highest form of technology available. It can be defined as either the most complex ...
companies, typically need to raise high volumes of capital in their early stages. For this reason, the public market provided by the stock exchanges has been one of the most important funding sources for many capital intensive startups. 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 public in the most prominent stock exchanges around the world in the total absence of sales, earnings, or any type of well-documented promising outcome. Though it's 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 with stock indexes tracking their performance (examples include the Alternext, CAC Small,
SDAX The SDAX (German abbreviation for ''Small-Cap-deutsche Aktienindex'') is a stock market index composed of 70 small and medium-sized companies in Germany. These so-called 'Small cap company, small caps' rank directly below the MDAX (mid-cap) shar ...
,
TecDAX The TecDAX stock index tracks the performance of the 30 largest German companies from the technology sector. In terms of order book turnover and market capitalization Market capitalization, sometimes referred to as market cap, is the total v ...
).


Alternatives to stock exchanges for raising capital


= Research and Development limited partnerships

= Companies have also raised significant amounts of capital through
R&D
R&D
limited partnership A limited partnership (LP) is a form of partnership similar to a general partnership except that while a general partnership must have at least two general partners (GPs), a limited partnership must have at least one GP and at least one limited p ...
s. 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.


=Venture capital

= A general source of capital for startup companies has been
venture capital Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to start-up company, startups, early-stage, and emerging companies that have been deemed to have high growth poten ...
. 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 an
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically Underwriting, underwritten by one or mo ...
or the
seasoned equity offering A seasoned equity offering or secondary equity offering (SEO) or capital increase is a new equity issued by an already publicly traded company. Seasoned offerings may involve shares sold by existing shareholders (non-dilutive), new shares (dilutiv ...
of an already listed company), it usually leads to
rational Rationality is the Quality (philosophy), quality of being guided by or based on reasons. In this regard, a person Action (philosophy), acts rationally if they have a good reason for what they do or a belief is rational if it is based on strong e ...

rational
allocation of resources because funds, which could have been consumed, or kept in idle
deposits A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, Transaction account#Current accounts, current accounts or any of several othe ...
with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher
productivity Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production proc ...
levels of firms.


Facilitating acquisitions

Companies view acquisitions as an opportunity to expand
product line Product may refer to: Business * Product (business) In marketing, a product is an object, or system, or service made available for consumer use as of the consumer demand; it is anything that can be offered to a Market (economics), market to s ...
s, increase distribution channels, hedge against volatility, increase their
market share Market share is the percentage of the total revenue or sales in a Market (economics), market that a company's business makes up. For example, if there are 50,000 units sold per year in a given industry, a company whose sales were 5,000 of those ...
, or acquire other necessary business
asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that c ...

asset
s. A takeover bid or
mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of Company, companies, other business organizations, or their operating units are transferred to or Consolidation (business), consolidated with another company or b ...
through the
stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange, as ...

stock market
is one of the simplest and most common ways for a company to grow by acquisition or fusion.


Profit sharing

Both casual and professional stock investors, as large as
institutional investor An institutional investor is an entity which pools money to purchase Security (finance), securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, ...
s or as small as an ordinary Middle class, middle-class family, through
dividend A dividend is a distribution of Profit (accounting), profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed ...

dividend
s and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders.


Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve management standards and Efficiency (economics), efficiency to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. This improvement can be attributed in some cases to the price mechanism exerted through shares of stock, wherein the price of the stock falls when management is considered poor (making the firm vulnerable to a takeover by new management) or rises when management is doing well (making the firm less vulnerable to a takeover). In addition, publicly listed shares are subject to greater transparency so that investors can make informed decisions about a purchase. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held company, privately 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 in corporate governance on the part of some public companies, particularly in the cases of accounting scandals. The policies that led to the dot-com bubble in the late 1990s and the subprime mortgage crisis in 2007–08 are also examples of corporate mismanagement. The mismanagement of companies such as Pets.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 Chapter 11 reorganization, General Motors (2009) and Satyam 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 investors tend to lose money as the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams.


Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors as minimum investment amounts are minimal. Therefore, the stock exchange provides the opportunity for small investors to own shares of the same companies as large investors.


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 Security (finance), securities known as bond (finance), 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, 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. A recession, Depression (economics), 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.


Listing requirements

Each stock exchange imposes its own listing requirements upon companies that want to be listed on that exchange. Such conditions may include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.


Examples of listing requirements

The listing requirements imposed by some stock exchanges include: * New York Stock Exchange: the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City New York, often called New York City or NYC, is the List o ...

New 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: NASDAQ requires a company to have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. * London Stock Exchange: the main market of the
London Stock Exchange London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Paul ...
requires a minimum market capitalization (£700,000), three years of audited financial statements, minimum public float (25%) and sufficient working capital for at least 12 months from the date of listing. * Bombay Stock Exchange: Bombay Stock Exchange (BSE) requires a minimum market capitalization of and minimum public float equivalent to .


Ownership

Stock exchanges originated as mutual organizations, owned by its member stockbrokers. However, the major stock exchanges have ''demutualized'', where the members sell their shares in an
initial public offering An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically Underwriting, underwritten by one or mo ...
. 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), Bursa Malaysia (2004), the
New York Stock Exchange The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City New York, often called New York City or NYC, is the List o ...

New York Stock Exchange
(2005), Bolsas y Mercados Españoles, and the São Paulo Stock Exchange (2007). The Shenzhen Stock Exchange and Shanghai Stock Exchange can be 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. Another example is Tashkent Stock Exchange established in 1994, three years after the collapse of the Soviet Union, mainly state-owned but has a form of a public corporation (joint-stock company). Korea Exchange (KRX) owns 25% less one share of the Tashkent Stock Exchange. 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., and Cboe Global Markets, except one, IEX. In 2019, a group of financial corporations announced plans to open a members owned exchange, Members 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 trade forward contracts on Commodity, commodities. Exchange traded forward contracts are called futures contracts. These ''commodity markets'' later started offering future contracts on other products, such as interest rates and shares, as well as option (finance), options contracts. They are now generally known as futures exchanges.


See also

* Auction * Capital market * Commodities exchange * Corporate governance * Federation of Euro-Asian Stock Exchanges * Financial regulation * :fr:Histoire des bourses de valeurs, Histoire des bourses de valeurs (French) * International Organization of Securities Commissions * Securities market participants (United States) * Stag profit * Stock exchanges for developing countries * Stock market data systems * 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 financial regulatory authorities by country * List of Swiss financial market legislation


References


External links

* {{Authority control Stock exchanges, Stock market, Exchange