Introduction to
Economics
Lesson 02/2006
STOCK
EXCHANGE
A stock exchange,[
sometimes called a stock market], is a centralised market for trading
securities. In a secondary sense, the term is also often used to refer
to the organisation which conducts the market or the place at which such
trading occurs.
As the name
suggests the securities traditionally traded were stock.
Stock itself has a variety of meanings, depending on the context
in which it is used. In
business and accountancy it means goods or merchandise.
In finance it refers to debenture bonds [or more simply
debentures, bonds or debts] issued or owed by governments, corporations
[in the sense of municipalities or other corporatised entities] and
companies. More commonly
the word is now used as being synonymous with share, meaning a fixed or
aliquot part of a company.
Trading on a stock
exchange can be either primary or secondary.
Primary trading occurs when a share or bond is first issued and
offered for purchase to would-be participants.
Subsequent transfers of existing shares or bonds are referred to
as secondary trading. Some
exchanges confine themselves to one or other function, others perform
both.
Over time the range
of securities traded by exchanges has broadened and can now include as
well as shares and bonds such financial instruments as unit trusts,
option contracts, derivatives and commodity futures.
SIGNIFICANCE
Stock exchanges
play a crucial role in the nature and development of a nation or an
area’s economy. They are
a natural and virtually essential prerequisite for a broad-based and
developed market economy. The
availability of and access to a stock exchange enables entrepreneurs and
businesses who need finance in order to put their ideas and aspirations
into affect to obtain it. At
the same time it provides people with money to invest on which they hope
to earn a return with the opportunity to do so.
Stock exchanges thereby facilitate the growth of business and the
development of an economy.
By introducing or
increasing the level of speculation in a society stock exchanges can
also be seen as generating risk, uncertainty and potential instability.
There is a associated element of gambling in almost all
investment. To that extent
stock exchanges can assume a similar role to that of a casino.
EARLY HISTORY
The early history
of stock exchanges have been traced back to C12 France
where a trade in debts was conducted by brokers called
courratiers de change. By
the late C13 commodity
traders in Flanders and the Low Countries began to organise their
meetings into what was referred to as a bourse.
Such institution is usually credited to the city of Bruges where
such traders habitually met at the home of a man named Van der Burse,
which became known as the Bruges Bourse.
Others suggest that the word bourse by which stock exchanges are
known in French speaking and influenced countries comes from bursa, the
Latin for bag or purse, a picture of three of which hung outside the
house in Bruges where they met.
The idea quickly
spread to and was developed by the Italian city-states such as Florence,
Pisa, Venice and Genoa, where bankers specialised in loans to
governments and offered facilities to trade them
The concept was taken up by the Dutch and the English who
developed the joint stock company in order to raise the money for
business ventures particularly for foreign trade and colonisation.
The Dutch East India Company issued the first shares on the
Amsterdam Stock Exchange in 1602. Its
arch rival the British East India company similarly raised money.
Much of the money
for colonising and developing the world was raised in European stock
markets. Such companies as
the Hudson’s Bay Company, the Virginia and the Plymouth companies
settled and developed North America.
Similar ventures operated throughout the world.
In England in 1720,
the so-called Bubble Act was passed.
Thereafter incorporation which had largely operated as a function
of personal contract was required to have legislative authority.
In Australia
trading of shares commenced in 1829 with the Bank of NSW granting
permission for its shares to be traded.
Within a short space of time stock exchanges began to be set up
in various cities throughout the colonies.
In 1840 the first
commodities exchange was set up in Chicago.
BUBBLES &
CRASHES
The history of
Stock Exchanges is replete with examples of so-called bubbles a stock
market crashes, from tulip mania in Holland to the collapse of Enron in
present-day USA, which have had significant effect on the local or even
wider economy. Some
particularly significant examples include the Mississippi and South Sea
Bubbles and the Great Crash of 1929.
David Sharp
February 2006