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Such trading may be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global securities market.
Stock exchanges also serve an economic function in providing liquidity to shareholders in providing an efficient means of disposing of shares. The idea of debt dates back to the ancient world , as evidenced for example by ancient Mesopotamian city clay tablets recording interest-bearing loans.
There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company 's founding in , while others point to earlier developments. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back as ancient Rome. In the Roman Republic , which existed for centuries before the Empire was founded, there were societates publicanorum , organizations of contractors or leaseholders who performed temple-building and other services for the government.
Participants in such organizations had partes or shares, a concept mentioned various times by the statesman and orator Cicero. In one speech, Cicero mentions "shares that had a very high price at the time. The societas declined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state. Tradable bonds as a commonly used type of security were a more recent innovation, spearheaded by the Italian city-states of the late medieval and early Renaissance periods.
While the Italian city-states produced the first transferable government bonds, they did not develop the other ingredient necessary to produce a fully-fledged capital market: As Edward Stringham notes, "companies with transferable shares date back to classical Rome, but these were usually not enduring endeavors and no considerable secondary market existed Neal, , p.
Control of the company was held tightly by its directors, with ordinary shareholders not having much influence on management or even access to the company's accounting statements. However, shareholders were rewarded well for their investment.
The company paid an average dividend of over 16 percent per year from to Financial innovation in Amsterdam took many forms. In investors led by one Isaac Le Maire formed history's first bear syndicate, but their coordinated trading had only a modest impact in driving down share prices, which tended to remain robust throughout the 17th century.
By the s the company was expanding its securities issuance with the first use of corporate bonds. Joseph de la Vega , also known as Joseph Penso de la Vega and by other variations of his name, was an Amsterdam trader from a Spanish Jewish family and a prolific writer as well as a successful businessman in 17th-century Amsterdam.
His book Confusion of Confusions  explained the workings of the city's stock market. It was the earliest book about stock trading and inner workings of a stock market, taking the form of a dialogue between a merchant, a shareholder and a philosopher, the book described a market that was sophisticated but also prone to excesses, and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment.
In England, King William III sought to modernize the kingdom's finances to pay for its wars, and thus the first government bonds were issued in and the Bank of England was set up the following year. Soon thereafter, English joint-stock companies began going public.
London's first stockbrokers, however, were barred from the old commercial center known as the Royal Exchange, reportedly because of their rude manners. Instead, the new trade was conducted from coffee houses along Exchange Alley.
By a broker named John Castaing, operating out of Jonathan's Coffee House , was posting regular lists of stock and commodity prices. Those lists mark the beginning of the London Stock Exchange.
One of history's greatest financial bubbles occurred in the next few decades. At the center of it were the South Sea Company , set up in to conduct English trade with South America, and the Mississippi Company , focused on commerce with France's Louisiana colony and touted by transplanted Scottish financier John Law , who was acting in effect as France's central banker.
Investors snapped up shares in both, and whatever else was available. In , at the height of the mania, there was even an offering of "a company for carrying out an undertaking of great advantage, but nobody to know what it is".
By the end of that same year, share prices had started collapsing, as it became clear that expectations of imminent wealth from the Americas were overblown. In London, Parliament passed the Bubble Act , which stated that only royally chartered companies could issue public shares. In Paris, Law was stripped of office and fled the country. Stock trading was more limited and subdued in subsequent decades. Yet the market survived, and by the s shares were being traded in the young United States.
Stock exchanges have multiple roles in the economy. This may include the following: A stock exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.
Besides the borrowing capacity provided to an individual or firm by the banking system , in the form of credit or a loan, there are four common forms of capital raising used by companies and entrepreneurs.
Most of these available options might be achieved, directly or indirectly, through a stock exchange. Capital intensive companies, particularly high tech companies, always need to raise high volumes of capital in their early stages. For this reason, the public market provided by the stock exchanges has been one of the most important funding sources for many capital intensive startups. This is quite different from the situation of the s to earlys period, when a number of companies particularly Internet boom and biotechnology companies went public in the most prominent stock exchanges around the world, in the total absence of sales, earnings and any well-documented promising outcome.
Anyway, every year a number of companies, including unknown highly speculative and financially unpredictable hi-tech startups, are listed for the first time in all the major stock exchanges — there are even specialized entry markets for these kind of companies or stock indexes tracking their performance examples include the Alternext , CAC Small , SDAX , TecDAX , or most of the third market good companies.
In order for a partnership to be of interest to investors today, the cash on cash return must be high enough to entice investors. A third usual source of capital for startup companies has been venture capital. A fourth alternative source of cash for a private company is a corporate partner , usually an established multinational company, which provides capital for the smaller company in return for marketing rights, patent rights, or equity.
Corporate partnerships have been used successfully in a large number of cases. When people draw their savings and invest in shares through an IPO or the issuance of new company shares of an already listed company , it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations.
This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms. Companies view acquisitions as an opportunity to expand product lines , increase distribution channels, hedge against volatility, increase their market share , or acquire other necessary business assets.
A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Both casual and professional stock investors , as large as institutional investors or as small as an ordinary middle-class family , through dividends and stock price increases that may result in capital gains , share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders.
By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies companies that are owned by shareholders who are members of the general public and trade shares on public exchanges tend to have better management records than privately held companies those companies where shares are not publicly traded, often owned by the company founders, their families and heirs, or otherwise by a small group of investors.
Despite this claim, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the late s, and the subprime mortgage crisis in —08, are classical examples of corporate mismanagement.
To assist in corporate governance many banks and companies worldwide utilize securities identification numbers ISIN to identify, uniquely, their stocks, bonds and other securities.
However, when poor financial, ethical or managerial records are known by the stock investors , the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams. As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford.
Therefore, the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the stock exchange whereby members of the public buy them, thus loaning money to the government.
The issuance of such bonds can obviate, in the short term, direct taxation of citizens to finance development—though by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.
At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth.
An economic recession , depression, or financial crisis could eventually lead to a stock market crash. Therefore, the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.
Each stock exchange imposes its own listing requirements upon companies that want to be listed on that exchange. Such conditions may include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.
Stock exchanges originated as mutual organizations , owned by its member stock brokers.
The Dow Jones Industrial Average was first published in , but the firms listed at that time were of course in existence before then, therefore the index can be calculated going back to 2 May Therefore, the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.
Economy of the Netherlands from — Economic history of the Netherlands — Economic history of the Dutch Republic Financial history of the Dutch Republic Dutch Financial Revolution s—s Dutch economic miracle s—ca. Each stock exchange imposes its own listing requirements upon companies that want to be listed on that exchange.