Stock exchange
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A stock exchange or bourse is a corporation or mutual organization which provides the facilities for stock brokers to trade company stocks and other securities. Stock exchanges also provide facilities for the issue and redemption of securities, as well as other financial instruments and capital events including the payment of income and dividends.
The securities traded on a stock exchange include shares issued by companies, unit trusts and other pooled investment products as well as bonds. To be able to trade a security on a certain stock exchange, it has to be listed there.
Usually there is a central location at least for recordkeeping, but trade is less and less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only; a stock broker is said to have a seat on the exchange.
A stock exchange is often the most important component of a stock market. 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 bonds are traded.
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.
Increasingly all stock exchanges are part of a global market for securities.
Supply and demand in stock markets is driven by various factors which, as in all free markets, affect the price of stocks (see stock valuation).
History of the Stock Exchange
In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.
Some stories suggest that the origins of the term "bourse" come from the latin bursa meaning a bag because, in 13c. Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.
However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam.
In the middle of the 13th century Venetian bankers began to trade in government securities. In 1351 the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens.
The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.
Listing requirements
Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there. To be listed on the New York Stock Exchange (NYSE), for example, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years ( [1]).
Ownership
Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an Initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples are Australian Stock Exchange (1998), Euronext (2000), NASDAQ (2002) and the New York Stock Exchange (2005).
Other types of exchange
In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other products, such as interest rates and shares, as well as options contracts. They are now generally known as futures exchanges.