Stock exchange: Functioning and history


A stock exchange or bourse is an exchange where stock brokers and traders can buy and/or sell stocks , bonds, and other securities. Stock exchanges may also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as “continuous auction” markets, with buyers and sellers consummating transactions at a central location, such as the floor of the exchange.

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 use electronic networks, which gives them advantages of increased speed and reduced cost of transactions.

The initial public offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. Stock exchanges are the most important component of the stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks.

When people talk stocks, they are usually talking about companies listed on the NYSE. It’s the big daddy and the big leagues. From a corporate perspective, anyone who’s anyone is listed there, and it can be difficult for investors to imagine a time when the NYSE wasn’t synonymous with investing. But, of course, it wasn’t always this way; there were many steps along the road to our current system of exchange. You may be surprised to learn that the first stock exchange thrived for decades without a single stock actually being traded.

Everything began with the moneylenders of Europe trading debts between each other. In the 1300’s, the Venetians were the leaders in the field and the first to start trading the securities from other governments. They would carry slates with information on the various issues for sale and meet with clients, much like a broker does today.
Belgium boasted a stock exchange as far back as 1531, in Antwerp.

Brokers and moneylenders would meet there to deal in business, government and even individual debt issues. At that time there were many flavors of business-financier partnerships that produced income like stocks do, but there was no official share that changed hands. In the 1600’s, the Dutch, British, and French governments all gave charters to companies with East India in their names.

On the cusp of imperialism’s high point, it seems like everyone had a stake in the profits from the East Indies and Asia except the people living there. In order to lessen the risk of a lost ship ruining their fortunes during sea voyages, ship owners had long been in the practice of seeking investors who would put up money for the voyage, outfitting the ship and crew in return for a percentage of the proceeds if the voyage was successful. These early limited liability companies often lasted for only a single voyage. They were then dissolved, and a new one was created for the next voyage.

When the East India companies formed, they changed the way business was done. These companies had stocks that would pay dividends on all the proceeds from all the voyages the companies undertook, rather than going voyage by voyage. These were the first modern joint stock companies.

This allowed the companies to demand more for their shares and build larger fleets. The size of the companies, combined with royal charters forbidding competition, meant huge profits for investors. In England, most brokers and investors did their business in the various coffee shops around London.

Debt issues and shares for sale were written up and posted on the shops’ doors or mailed as a newsletter. The budding financial boom in England came so quickly that were no rules or regulations for the issuing of shares. The South Seas Company (SSC) emerged with a similar charter from the king and its shares, and the numerous re-issues, sold as soon as they were listed.

The first stock exchange in London was officially formed in 1773, a scant 19 years before the New York Stock Exchange. Whereas the London Stock Exchange (LSE) was handcuffed by the law restricting shares, the New York Stock Exchange has dealt in the trading of stocks, for better or worse, since its inception. Formed by brokers under the spreading boughs of a buttonwood tree, the New York Stock Exchange made its home on Wall Street.
The Nasdaq was the brainchild of the National Association of Securities Dealers (NASD), now called the Financial Industry Regulatory Authority (FINRA).