Introduction to Stock Exchanges
The history of stock exchanges can be
traced to 12th century France, when the first brokers are believed to have
developed, trading in debt and government securities. Unofficial stock markets
existed across Europe through the 1600s, where brokers would meet outside or in
coffee houses to make trades. The Amsterdam Stock Exchange, created in 1602,
became the first official stock exchange when it began trading shares of the
Dutch East India Company. These were the first company shares ever issued.
By the early 1700s there were fully
operational stock exchanges in France and England, and America followed in the
later part of the century. Stock exchanges became an important way for
companies to raise capital for investment, while also offering investors the
opportunity to share in company profits. The early days of the stock exchange
experienced many scandals and stock crashes, as there was little to no
regulation and almost anyone was allowed to participate in the exchange.
Today, stock exchanges operate around
the world, and they have become highly regulated institutions. Investors
wanting to buy and sell stocks must do so through a stock broker, who pays to
own a seat on the exchange. Companies with stocks traded on an exchange are
said to be 'listed' and they must meet specific criteria, which varies across
exchanges. Most stock exchanges began as floor exchanges, where traders made
deals face-to-face. The largest stock exchange in the world, the New York Stock
Exchange, continues to operate this way, but most of the world's exchanges have
now become fully electronic.
Participants in the stock market range from small
individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end
up with a professional at a stock exchange, who executes the order of
buying or selling.
As said previously, some
exchanges are physical locations where transactions are carried out on a
trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where
traders may enter "verbal" bids and offers simultaneously. The other
type of stock exchange is a virtual kind, composed of a network of computers
where trades are made electronically via traders.
Actual trades are based
on an auction market model where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock.
(Buying or selling at market
means you will accept any ask
price or bid price for the stock, respectively.) When the bid and ask prices
match, a sale takes place, on a first-come-first-served basis if there are
multiple bidders or askers at a given price.
The purpose of a stock
exchange is to facilitate the exchange of securities between buyers and
sellers, thus providing a marketplace (virtual or real). The
exchanges provide real-time trading information on the listed securities,
facilitating price discovery
The following table provides specific
information about some of the most important share markets in today’s society.
Securities
Orderbook (NYSE Open book)