| Although common, the term 'the stock market' | | | | the brokerage firm, who then notifies the |
| is a somewhat abstract concept for the | | | | investor who placed the order. Although there |
| mechanism that enables the trading of company | | | | is human contact in this process, don't think |
| stocks. It is also used to describe the | | | | that the NYSE is still in the Stone Age; |
| totality of all stocks and sometimes other | | | | computers do play a huge role in the process, |
| securities, with the exception of bonds, | | | | especially for so-called "program trading". |
| commodities, and derivatives. The term is | | | | |
| used especially to apply within one country | | | | The Nasdaq is a virtual (listed) exchange, |
| as, for example, in the phrase "the stock | | | | where all of the trading is done by |
| market was up today", or in the term "stock | | | | computers. The process is similar to the |
| market bubble". Bonds are still traditionally | | | | above, in that the seller provides an asking |
| traded in an informal, over-the-counter | | | | price and the buyer provides a bidding price. |
| market known as the bond market. Commodities | | | | However, buyers and sellers are |
| are traded in commodities markets, and | | | | electronically matched. One or more Nasdaq |
| derivatives are traded in a variety of | | | | market makers will always provide a bid and |
| markets (but, like bonds, mostly | | | | ask price at which they will always purchase |
| 'over-the-counter'). The size of the | | | | or sell 'their' stock. |
| worldwide 'bond market' is estimated at $45 | | | | |
| Trillion; the size of the 'stock market' is | | | | The Paris Bourse, now part of Euronext is an |
| estimated as about half that. | | | | order-driven, electronic stock exchange. It |
| | | | was automated in the late 1980s. Before, it |
| The world derivatives market has been | | | | consisted of an open outcry exchange. |
| estimated at about $300 Trillion.[1][2] The | | | | Stockbrokers met in the trading floor or the |
| major U.S. Banks alone are said to account | | | | Palais Brongniart. |
| for about $100 Trillion. It must be noted | | | | |
| though that the derivatives market, because | | | | In 1986, the CATS trading system was |
| it is stated in terms of notional outstanding | | | | introduced, and the order matching process |
| amounts, can not be directly compared to a | | | | was fully automated. |
| stock or fixed income market, which refers to | | | | |
| actual value. | | | | Market participants Many years ago, |
| | | | worldwide, buyers and sellers were individual |
| The stock market is distinct from a stock | | | | investors, such as wealthy businessmen, with |
| exchange, which is an entity (a corporation | | | | long family histories (and emotional ties) to |
| or mutual organization) in the business of | | | | particular corporations. Over time, markets |
| bringing buyers and sellers of stocks and | | | | have become more "institutionalized"; buyers |
| securities together. For example, 'the stock | | | | and sellers are largely institutions (e.g., |
| market' in the United States includes the | | | | pension funds, insurance companies, mutual |
| trading of all securities listed on the NYSE, | | | | funds, hedge funds, investor groups, and |
| the NASDAQ, the Amex, as well as on the many | | | | banks). The rise of the institutional |
| regional exchanges, the OTCBB, and Pink | | | | investor has brought with it some |
| Sheets. European examples of stock exchanges | | | | improvements in market operations (but not |
| include the Paris Bourse (now part of | | | | necessarily in the interest of the small |
| Euronext), the London Stock Exchange and the | | | | investor or even of the naive institutions, |
| Deutsche Börse. | | | | of which there are many). |
| | | | |
| Trading Participants in the stock market | | | | Thus, the government was responsible for |
| range from small individual stock investors | | | | "fixed" (and exorbitant) fees being markedly |
| to large hedge fund traders, who can be based | | | | reduced for the 'small' investor, but only |
| anywhere. Their orders usually end up with a | | | | after the large institutions had managed to |
| professional at a stock exchange, who | | | | break the brokers' solid front on fees (they |
| executes the order. | | | | then went to 'negotiated' fees, but only for |
| | | | large institutions). |
| Most stocks are traded on exchanges, which | | | | |
| are places where buyers and sellers meet and | | | | However, corporate governance (at least in |
| decide on a price. Some exchanges are | | | | the West) has been greatly affected by the |
| physical locations where transactions are | | | | rise of institutional 'owners.' History |
| carried out on a trading floor, by a method | | | | Braudel suggests that in Cairo in the 11th |
| known as open outcry. (You've probably seen | | | | century Islamic and Jewish merchants had |
| pictures of a trading floor, in which traders | | | | already set up every form of trade |
| are wildly throwing their arms up, waving, | | | | association and had knowledge of every method |
| yelling, and signaling to each other.) This | | | | of credit and payment, disproving the belief |
| type of auction is used in stock exchanges | | | | that these were invented later by Italians. |
| and commodity exchanges where traders may | | | | |
| enter "verbal" bids and offers | | | | In 12th century France the courratier de |
| simultaneously. The other type of exchange is | | | | change were concerned with managing and |
| a virtual kind, composed of a network of | | | | regulating the debts of agricultural |
| computers where trades are made | | | | communities on behalf of the banks. |
| electronically via traders at computer | | | | |
| terminals Actual trades are based on an | | | | Because these men also traded with debts, |
| auction market paradigm where a potential | | | | they could be called the first brokers. |
| buyer bids a specific price for a stock and a | | | | |
| potential seller asks a specific price for | | | | In late 13th century Bruges commodity traders |
| the stock. (Buying or selling at market means | | | | gathered inside the house of a man called Van |
| you will accept any bid or ask price for the | | | | der Beurse, and in 1309 they became the |
| stock.) When the bid and ask prices match, a | | | | "Brugse Beurse", instituionalizing what had |
| sale takes place on a first come first serve | | | | been, until then, an informal meeting. The |
| basis if there are multiple bidders or askers | | | | idea quickly spread around Flanders and |
| at a given price. | | | | neighboring counties and "Beurzen" soon |
| | | | opened in Ghent and Amsterdam. |
| The purpose of a stock exchange is to | | | | |
| facilitate the exchange of securities between | | | | In the middle of the 13th century Venetian |
| buyers and sellers, thus providing a | | | | bankers began to trade in government |
| marketplace (virtual or real). Just imagine | | | | securities. In 1351 the Venetian government |
| how difficult it would be to sell shares (and | | | | outlawed spreading rumors intended to lower |
| what a disadvantage you would be at with | | | | the price of government funds. Bankers in |
| respect to the buyer) if you had to call | | | | Pisa, Verona, Genoa and Florence also began |
| around trying to locate a buyer, as when | | | | trading in government securities during the |
| selling a house. Really, a stock exchange is | | | | 14th century. This was only possible because |
| nothing more than a super-sophisticated | | | | these were independent city states not ruled |
| farmers' market providing a meeting place for | | | | by a duke but a council of influential |
| buyers and sellers. | | | | citizens. |
| | | | |
| The New York Stock Exchange is a physical | | | | The Dutch later started joint stock |
| exchange, where much of the trading is done | | | | companies, which let shareholders invest in |
| face-to-face on a trading floor. This is also | | | | business ventures and get a share of their |
| referred to as a "listed" exchange (because | | | | profits - or losses. In 1602, the Dutch East |
| only stocks listed with the exchange may be | | | | India Company issued the first shares on the |
| traded). Orders enter by way of brokerage | | | | Amsterdam Stock Exchange. It was the first |
| firms that are members of the exchange and | | | | company to issue stocks and bonds. |
| flow down to floor brokers who go to a | | | | |
| specific spot on the floor where the stock | | | | The Amsterdam Stock Exchange (or Amsterdam |
| trades. At this location, known as the | | | | Beurs) is also said to have been the first |
| trading post, there is a specific person | | | | stock exchange to introduce continuous trade |
| known as the specialist whose job is to match | | | | in the early 17th century. The Dutch |
| buy orders and sell orders. Prices are | | | | "pioneered short selling, option trading, |
| determined using an auction method known as | | | | debt-equity swaps, merchant banking, unit |
| "open outcry": the current bid price is the | | | | trusts and other speculative instruments, |
| highest amount any buyer is willing to pay | | | | much as we know them" (Murray Sayle, "Japan |
| and the current ask price is the lowest price | | | | Goes Dutch", London Review of Books XXIII.7, |
| at which someone is willing to sell; if there | | | | April 5, 2001). |
| is a spread, no trade takes place. For a | | | | |
| trade to take place, there must be a matching | | | | There are now stock markets in virtually |
| bid and ask price. (If a spread exists, the | | | | every developed and most developing |
| specialist is supposed to use his own | | | | economies, with the world's biggest markets |
| resources of money or stock to close the | | | | being in the United States, UK, Germany, |
| difference, after some time.) Once a trade | | | | France, and Japan. |
| has been made, the details are sent back to | | | | |