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traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities
for issue and redemption of securities and other financial instruments, and capital events
including the payment of income and dividends. Securities traded on a stock exchange
include shares issued by companies, unit trusts, derivatives, pooled investment products
and bonds.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually,
there is a central location at least for record keeping, but trade is increasingly less linked
to such a physical place, as modern markets are electronic networks, which gives them
advantages of increased speed and reduced cost of transactions. Trade on an exchange is
by members only.
The initial offering of stocks and bonds to investors is by definition done in the primary
market and subsequent trading is done in the secondary market. A stock exchange is
often the most important component of a stock market. Supply and demand in stock
markets is driven by various factors that, as in all free markets, affect the price of stocks
(see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must
stock be subsequently traded on the exchange. Such trading is said to 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 market for securities.
The Stock Exchange provide companies with the facility to raise capital for expansion
through selling shares to the investing public.[3]
When people draw their savings and invest in shares, it leads to a more rational allocation
of resources because funds, which could have been consumed, or kept in idle deposits
with banks, are mobilized and redirected to 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.
Both casual and professional stock investors, through dividends and stock price increases
that may result in capital gains, share in the wealth of profitable businesses.
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
and/or 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 1990's, and the subprime mortgage crisis in
2007-08, are classical examples of corporate mismanagement. Companies like Pets.com
(2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001),
Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International
Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General Motors (2009) and
Satyam Computer Services (2009) were among the most widely scrutinized by the media.
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.
At the stock exchange, share prices rise and fall depending, largely, on market 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
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1.
Charts like this one are often used to graphically display historic stock price
movement.
Capital Formation
2. One of the most important objectives of a stock exchange is capital
formation. This refers to the accumulation of vast quantities of money
necessary to start large ventures. Power plants, automobile production
facilities, computer chip manufacturers and many other endeavors require
tens or hundreds of millions of dollars of investment before they can produce
any profit. Without corporate organization, which accumulates capital
(money) while dispersing ownership, many of these projects would not be
possible.
Connecting Traders
3. The stock exchange also facilitates trading. One of the advantages of
corporate organization is that stakeholders may sell their interest to another
party. At any one time, hundreds or even thousands of individuals may wish
to sell their shares of stock, while as many investors may wish to purchase
the same security. Stock exchanges put in place the infrastructure necessary
to connect these buyers and sellers. Many stock exchanges occupy physical
buildings in which traders, brokers and other agents of the system work.
Other exchanges occupy no centralized physical location and operate
through telecommunication and computer networks.
Security
4. The operators of stock exchanges, in cooperation with their governments,
have designed and implemented laws and regulations determining how the
system should function. These rules are intended to protect the investor from
unfair advantages taken by people possessing special knowledge. They also
obligate people who have entered into contracts to honor those contracts or
face criminal prosecution. The goal of regulation is to allow people who may
not always trust each other to do business with each other, because they
trust the system.
Economic Indicator
5. Though not originally intended to function as such, stock exchanges also
work as instruments to quantify the state of an economy. Even a casual
observation of the general trends on major stock exchanges can give some
insight into the state of a national or regional economy, or even the global
economy.
At first, stock exchanges were completely open. Anyone who wished to buy or sell could do so at
a stock exchange. However, to make stock exchange more effective, membership became
limited to those in clubs and other associations. Today, professionals who have a seat at the
exchange are the people who trade at the exchange.
Stock markets affect the entire economy and encourage investment. In the United States, larger
cities including Boston, New York, Philadelphia, Denver, Chicago, Los Angeles, and San
Francisco all have stock exchanges. Major cities across the world also have exchanges of their
own.
Not all stocks are listed on exchanges. Some are sold on the so-called over-the-counter market,
which means that they are sold and bought directly by brokers. This method of buying became
especially important during the early 1980s. Today, online stock exchange is even more covalent.
Thanks to the growth of the Internet almost anyone can sell and buy stocks online. Investors
simply tell their banks or investment brokers online what they wish to trade and when and the
brokers hired by the online trading system buy or sell stocks for the client electronically.
If a broker approaches a post and sees that the price of the stock is what they are authorized to
pay, the broker can complete the transaction themselves. As soon as a transaction occurs, the
broker makes a memorandum and reports it to the brokerage office by telephone instantly. At the
post, an exchange employee jots down on a special card the details of the transaction including
the stock symbol, the number of shares, and the price of the stocks. The employee then puts the
card into an optical reader. The reader puts this information into a computer and transmits the
information of the buy or sell of the stock to the market. This means that information about the
transaction is added to the stock market and the transaction is counted on the many stock market
tickers and information display devices that investors rely on all over the world. Today, markets
are instantly linked by the Internet, allowing for faster exchange.