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 areaís 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 Hudsonís 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

 

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