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Issuing
Stock Exchange
A stock exchange, also known as a bourse or securities exchange, is an exchange where traders and stockbrokers can sell and buy bonds, shares of stock, and other financial instruments.
Stock exchanges can also provide facilities for the issue and redemption of financial instruments and securities and capital events like the payment of dividends and income. Securities traded on a bourse include stock issued by:
- Listed companies
- Unit trusts
- Derivatives
- Pooled investment products
- Bonds
History of Stock Exchanges
The history of stock exchanges dates back to the 16th century when the first stock market was established in Antwerp, Belgium. It was created to trade government bonds and quickly became a popular trading centre for investors. The Amsterdam Stock Exchange was started in the 17th century and soon became Europe’s most important stock market. In the 18th century, the London Stock Exchange was established. It rapidly became the largest stock market in the world. Meanwhile, in the United States, the Philadelphia Stock Exchange was founded in 1790, followed by the New York Stock Exchange in 1817. The evolution of stock exchanges continued throughout the 19th and 20th centuries, with the introduction of new technologies and regulations that transformed the way stocks were traded. In the late 1800s, the establishment of telegraphic communication allowed for real-time trading and increased the efficiency of stock markets. In the early 20th century, stock exchanges began implementing new regulations to prevent fraud and protect investors. In the 1960s, the development of computerised trading systems revolutionised stock exchanges worldwide. Electronic trading allowed for faster and more accurate exchanges. It helped democratise the stock market by giving individual investors the same information as professional traders. The 21st century saw the rise of the Internet and mobile technologies. It further transformed stock exchanges. Small investors can now trade directly on exchanges using online brokerage accounts, and new markets like cryptocurrency exchanges have emerged. Today, stock exchanges play a crucial role in the global economy, providing a platform for companies to access capital and for investors to make informed decisions about where to put their money. While the technology and regulations governing stock exchanges continue to change, their fundamental purpose remains: to facilitate the exchange of securities between buyers and sellers fairly and transparently.The Role of Stock Exchanges in the Economy
Stock exchanges play a myriad of roles in both local and global economies, such as:Raising Capital for Businesses
Capital-intensive companies, especially tech companies, often need to raise high volumes of capital in their early days. Stock exchanges allow them to do that by selling shares to public investors. For this reason, the public market provided by stock exchanges is one of the most important funding sources for many startups. Alternatives to stock exchanges for raising capital Hedge funds, venture capital, private equity, structured products, collectibles, commodities, angel funds, and real estate are alternative mediums for starting businesses to raise money. Research and Development limited partnerships Companies can also raise considerable amounts of capital via R&D limited partnerships. In 1987, the United States government enacted tax law changes to change the tax deductibility of investments in R&D limited partnerships. Today, for a partnership to be of interest to investors, the cash-on-cash return must be on the higher end of the spectrum. Venture Capital Since the 1970s, venture capital has been an available source of startup capital. The only major downside is that the maximum statistical amount that the venture company firms will invest in any one company is unlimited. Corporate Partners Corporate partners (typically reputable international companies) are another alternative source of cash for private companies. They fund smaller businesses in exchange for marketing rights, equity, or patent rights. There are many cases in which such partnerships have been highly successful.Mobilising Savings for Investment
When people draw their savings to invest in shares, it creates a rational allocation of resources. This is because funds that could have been consumed or kept in idle deposits are being mobilised and redirected to help companies finance their endeavours. This can benefit businesses in several sectors, including agriculture, commerce, and industry, by leading to higher productivity and more robust economic growth.Facilitating Acquisitions
Businesses see acquisitions as an opportunity to expand their portfolio, network, and operational capacity. It also enables them to hedge against volatility, acquire necessary assets, and increase their market share. Takeover bids, mergers, and acquisitions through the stock market are standard techniques companies use to grow.Profit Sharing
Through dividends and stock price increases that result in capital gains, stock investors of all sizes share in the wealth of profitable organisations. Troubled and unprofitable businesses, on the other hand, can result in capital losses for their shareholders.Corporate Governance
The quality of management plays an essential role in the price of stocks. When it’s good, the price goes up; when it’s poor, the price goes down. Publicly listed shares are more in demand as they’re subject to greater transparency. It enables investors to make informed decisions about their purchases. Despite being subject to more strict rules imposed by governments and public stock exchanges, public corporations allegedly have better management. It is because of their broad and varied scope of owners, which tends to improve governance standards, making it easier to satisfy the demands of their shareholders. Governments, companies, and funds use the International Securities Identification Number (ISIN) system worldwide. Many banks and companies use ISINs to identify their bonds, stocks, and other securities.Creating Investment Opportunities for Small Investors
Since minimum investment amounts are minimal, investing in shares is open to small and large stock investors. This is in contrast to other businesses that require large capital outlay. The stock exchange allows small investors to own shares in the same companies as their larger counterparts.Government Capital-Raising for Development Projects
It’s not uncommon for governments at various levels to borrow money to finance various infrastructure projects by selling securities known as bonds. Bonds can be raised through stock exchanges whereby traders or members of the public can buy them, thus loaning money to governments.Barometer of the Economy
Share prices rise and drop based on economic forces. Prices go up and remain stable when companies and the economy show growth and stability. Alternatively, in times of depression, recession, and financial crisis, the stock market can crash, leading to economic disparity and failure. The movement of share prices and stock indexes is an important indicator of economic trends.Listing Requirements
Each stock exchange imposes its listing requirements. Companies that wish to be listed must abide by these rules. Some conditions may include the following:- Minimum annual income
- Minimum market capitalisation
- Minimum number of shares outstanding
- Bombay Stock Exchange: The BSE requires a minimum market capitalisation of US$3.1 million and a minimum public float equivalent of US$1.3 million.
- London Stock Exchange: The primary market at the LSE requires three years of audited financial statements, a minimum public float (25%), a minimum market capitalisation (£700,000), and sufficient operative capital for a least 12 months from the date of listing.
- NASDAQ Stock Exchange: NASDAQ requires an organisation to have earned more than $11 million over the last 36 months and issued at least 1.25 million shares worth at least $70 million.
- New York Stock Exchange: NYSE requires a company to have earned over $10 million over the last three years and issued at least $1.1 million shares worth a minimum of $40 million.