STOCK EXCHANGE

A stock exchange is an entity 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, derivatives, 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 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 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 derivatives and bonds are traded. Increasingly, stock exchanges are part of a
global market for securities.

The first stock exchanges

In 12th 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" came from the Latin bursa meaning a bag
because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the
house where merchants met.

House Ter Beurze in Bruges, Belgium.

The story may well be apocryphal, however it is possible that in the late 13th century commodity
traders in Bruges gathered inside the house of the Van der Burse family (for some a Venetian family
with original name "Della Borsa" and three leather bags as coat-of-arms), and in 1309 they
institutionalized this until now informal meeting and became the "Bruges Bourse." The idea spread
quickly around Flanders and neighboring counties and "Bourses" 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. 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.
On May 17, 1792, in order to more easily trade cotton, twenty-four supply brokers signed the
Buttonwood Agreement outside 68 Wall Street in New York underneath a buttonwood tree. On March
8, 1817, properties got renamed to New York Stock & Exchange Board. In the 19th century,
exchanges (generally famous as futures exchanges) got substantiated to trade futures contracts and
then choices contracts.

There are now a large number of stock exchanges in the world.

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 provide companies with the facility to raise capital for expansion through selling
shares to the investing public.[2]

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 stronger economic growth and higher productivity
levels of 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 the 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, through dividends and 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 and efficiency 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).

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 1990's, 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.

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, 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.

Major stock exchanges

London Stock Exchange, the City of London
New York Stock Exchange, New York City
Sao Paulo Stock Exchange, Sao Paulo
Australian Securities Exchange's Sydney Exchange Centre, Sydney

20 Major Stock Exchanges : Year ended 31 December 2009

Source: World Federation of Exchanges - Statistics/Monthly

Market Capitalization Trade Value

Economy Stock Exchange
(USD Billions) (USD Billions)
 United States New York Stock Exchange 11838 17521
 Japan Tokyo Stock Exchange 3306 3704
 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 an
initial 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.

STOCK MARKET
stock exchange: an exchange where security trading is conducted by professional stockbrokers

A place where shares, stocks and bonds are bought and sold.

stock index: index based on a statistical compilation of the share prices of a number of representative stocks

A stock market or equity market is a public market (a loose network of economic transactions, not a
physical facility or discrete entity) for the trading of company stock 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 US 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 cap, is the
New York Stock Exchange, NYSE. In Canada, the largest stock market is the Toronto Stock
Exchange. Major European examples of stock exchanges include the London Stock Exchange, Paris
Bourse, and the Deutsche Börse. Asian examples include 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.