- 1 Introduction
- 2 History of stock exchanges
- 3 Online stock exchange
- 4 How it works?
- 5 Types of stocks
- 5.1 Preferred stock
- 5.2 Common stock
- 5.3 Growth stock
- 5.4 Dividend stock
- 5.1 Preferred stock
- 6 Importance of stock exchange
- 7.1 Raising capital for businesses
- 7.2 Mobilizing savings for investment
- 7.3 Facilitating company growth
- 7.4 Redistribution of wealth
- 7.5 Corporate governance
- 7.6 Creating investment opportunities for small investors
- 7.7 Government capital-raising for development projects
- 7.8 Barometer of the economy
- 7.1 Raising capital for businesses
- 9 Ownership
- 10 Other types of exchanges
- 11 The future of stock exchanges
- 12 Methods used for valuation
- 12.1 Gordon model
- 12.2 Dividend yield
- 12.3 Earnings per share
- 12.1 Gordon model
- 13 American stock exchange
13 New York Stock Exchange
14 Lahore Stock Exchange
15 Karachi Stock Exchange
- 1 Trading
- 2 Market participants
- 3 History
- 5 Stock market index
- 6 Derivative instruments
- 8 New issuance
- 9 Investment strategies
- 10 Taxation
A stock exchange, share market or bourse is a corporation or mutual organization which provides "trading" facilities for stock brokers and traders, to trade 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 and 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. 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 are driven by various factors which, 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 bonds are traded. Increasingly, stock exchanges are part of a global market for securities.
In 11th century France the courtiers 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 13th century 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 neighboring counties and "Bourses" soon opened in Ghent and Amsterdam.
The house of the Beurze family on Vlaamingstraat Bruges was the site of the worlds first stock Exchange, circa 1415. The term Bourse is believed to have derived from the family name Beurze.
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 ruled by a council of influential citizens, not by a duke.
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. In 1688, the trading of stocks began on a stock exchange in London.
Online Stock Exchange:
A stock exchange is simply a market that is designed for the sale and purchase of securities of corporations and municipalities. A stock exchange sells and buys stocks, shares, and other such securities. In addition, the stock exchange sometimes buys and sells certificates representing commodities of trade. This article discusses:
- What is the principle behind the operation of stock exchanges?
- What are the functions and processes involved in stock exchanges?
- Know in detail about major stock exchanges
Understanding what a stock exchange is and how an online stock exchange works, can help you make the right decisions when it comes to your investment. Being able to follow the NY stock exchange and being able to understand the NASDAQ stock exchange numbers that appear on your news every evening can help you become a better investor and can help you profit more from the stock market.
How Does A Stock Exchange Work?
The buying and selling of stocks at the exchange is done on an area which is called the floor. All over the floor are positions which are called posts. Each post has the names of the stocks traded at that specific post. If a broker wants to buy shares of a specific company they will go to the section of the post that has that stock. If the broker sees at the price of the stock is not quite what the broker is authorized to pay, a professional called the specialist may receive an order. The specialist will often act as a go-between between the seller and buyer. What the specialist does is to enter the information from the broker into a book. If the stock reaches the required price, the specialist will sell or buy the stock according to the orders given to them by the broker. The transaction is then reported to the investor.
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.
How does a stock exchange operate and how a transaction is made there?
Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You've probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.
The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers' market linking buyers and sellers.
What are the different types of stocks available in the market?
There are different types of stocks to choose in the stock market. While you do not necessarily have to be an expert on all the types of stocks available in stock market content, being able to differentiate and choose stocks is crucial to stock market investing. This article helps you to know more on:
- What re the various types of stocks available?
- What are the features of preferred stocks?
- What are the characteristics of blue chip stocks?
There are different types of stocks to choose in the stock market. While you do not necessarily have to be an expert on all the types of stocks available in stock market content, being able to differentiate and choose stocks is crucial to stock market investing. Depending on your goals and your investment, you may simply find that some stocks are better suited to your needs than others. At the very least, being able to tell the difference between preferred and common stocks can help you get started in investing.
Preferred Stocks and Common Stocks:
All stocks are generally designated as preferred or common. Common stocks are stocks that offer you a bit of ownership of a company. Each common stock you have offers you a specific amount of ownership, entitles you to some dividends and allows you one vote for each share you own in electing directors or making key business decisions. Common stocks in this sense are different from debentures or bonds, which are money given to a company as a loan in return for the promise of specific interest.
Preferred stock offers you preferential treatment when it comes to paying out of dividends. If the company goes bankrupt, stocks holders holding preferred equities get faster access to any assets not used towards paying debts. If you have preferred cumulative stock, your position is secure. This type of stock allows unpaid dividends to be accrued. If a company cannot pay dividends one year, your dividends accrue until the company can pay. During such period all the money owed over the previous years will be paid. Those holding preferred types of stock usually have no voting ability and these stocks only get their pre-determined dividend and not more than that. This is to offset the other advantages of preferred status.
Growth stocks are stocks of companies that are experiencing rapid growth and are expected to continue growing in the future. A company with growth stocks is generally a stable company that is experiencing larger sales as well as incurring reasonable expenses. Such a company invests money in new products. These stocks are attractive to investors since they allow investors to make money from a growing and prospering company. However, these stocks can also be a risk. These stocks are often expensive, and of course there is no guarantee that a company will continue to grow and prosper as projected
What Are Dividend Stocks?
Dividend stocks are those stocks that pay a yearly dividend or cash amount in addition to having an inherent buying and selling value. Having high dividend stocks means that you make money each year that a company profits. This article takes you through:
Dividend stocks are those stocks that pay a yearly dividend or cash amount in addition to having an inherent buying and selling value. Having high dividend stocks means that you make money each year that a company profits. The best dividend stocks are used by wealthy people in order to create a passive income. Thanks to the Internet, almost any investor can start investing in these stocks. It is easy to find a list of dividend paying stocks and even get newsletters that feature monthly dividend stocks right in your mailbox or email inbox. If you want to make money regularly from your investments, as well as make money when buying and selling your securities, dividend yielding stocks may be the solution.
The Importance of the Stock Exchange:
Stock exchanges perform important roles in national economies. Most importantly, they encourage investment by providing places for buyers and sellers to trade securities. This investment, in turn, enables corporations to obtain funds to expand their businesses.
Corporations issue new securities in what is known as the primary market, usually with the help of investment bankers (see Investment Banking). The investment bank acquires the initial issue of the new securities from the corporation at a negotiated price and then makes the securities available for its clients and other investors in an initial public offering (IPO). In this primary market, corporations receive the proceeds of security sales. After this initial offering the securities are bought and sold in the secondary market. The corporation is not usually involved in the trading of its stock in the secondary market. Stock exchanges essentially function as secondary markets. By providing investors the opportunity to trade financial instruments, the stock exchanges support the performance of the primary markets. This arrangement makes it easier for corporations to raise the funds that they need to build and expand their businesses.
Although corporations do not directly benefit from secondary market transactions, the managers of a corporation closely monitor the price of the corporation's stock in secondary markets. One reason for this concern involves the cost of raising new funds for further business expansion. The price of a company's stock in the secondary market influences the amount of funds that can be raised by issuing additional stock in the primary market.
Corporate managers also pay attention to the price of the company's stock in secondary markets because it affects the financial wealth of the corporation's owners—the stockholders. If the price of the stock rises, then the stockholders become wealthier. This is likely to make them happy with the company's management. Typically, managers own only small amounts of a corporation's outstanding shares. If the price of the stock declines, the shareholders become less wealthy and are likely to be unhappy with management. If enough shareholders become unhappy, they may move to replace the corporation's managers. Most corporate managers also receive options to buy company stock at a selected price, so they are motivated to increase the value of the stock in the secondary market.
Stock exchanges encourage investment by providing this secondary market. Stock exchanges also encourage investment in other ways. They protect investors by upholding rules and regulations that ensure buyers will be treated fairly and receive exactly what they pay for. Exchanges also support state-of-the-art technology and the business of brokering. This support helps traders buy and sell securities quickly and efficiently. Of course, being able to sell a security in the secondary market increases the relative safety of investing because investors can unload a stock that may be on the decline or that faces an uncertain future.
Stock exchanges have multiple roles in the economy, this may include the following:
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 a stronger economic growth and higher productivity levels and firms.
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its 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.
Stocks exchanges do not exist to redistribute wealth. However, both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.
By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order 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). However, 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 (Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat (2003), are among the most widely scrutinized by the media).
Creating investment opportunities for small investors:
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.
Government capital-raising for development projects:
Governments at various levels may decide to borrow money in order 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 the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the 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 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.
Listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange. Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income.
Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchange:
- NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years.
- New York Stock Exchange: 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.
- Bombay Stock Exchange:
Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of Rs.250 Million and minimum public float equivalent to Rs.100 Million.
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 Securities Exchange (1998), Euronext (merged with New York Stock Exchange), NASDAQ (2002), the New York Stock Exchange (2005), Bolsas y Mercados Españoles, and the São Paulo Stock Exchange (2007).
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.
The future of stock trading appears to be electronic, as competition is continually growing between the remaining traditional New York Stock Exchange
specialist system against the relatively new, all Electronic Communications Networks, or ECNs. ECNs point to their speedy execution of large block trades, while specialist system proponents cite the role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders.
The ECNs contend that an array of special interests profit at the expense of investors in even the most mundane exchange-directed trades. Machine-based systems, they argue, are much more efficient, because they speed up the execution mechanism and eliminate the need to deal with an intermediary.
Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all exchanges) has been slow to respond to technological innovation. Conversion to all-electronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders."
William Lupien, founder of the Instinet trading system and the OptiMark system, has been quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast once you reach the tipping point. We're now at the tipping point."
Congress mandated the establishment of a national market system of multiple exchanges in 1975. Since then, ECNs have been developing rapidly.
One example of improved efficiency of ECNs is the prevention of front running, by which manual Wall Street traders use knowledge of a customer's incoming order to place their own orders so as to benefit from the perceived change to market direction that the introduction of a large order will cause. By executing large trades at lightning speed without manual intervention, ECNs make impossible this illegal practice, for which several NYSE floor brokers were investigated and severely fined in recent years. Under the specialist system, when the market sees a large trade in a name, other buyers are immediately able to look to see how big the trader is in the name, and make inferences about why s/he is selling or buying. All traders who are quick enough are able to use that information to anticipate price movements.
ECNs have changed ordinary stock transaction processing (like brokerage services before them) into a commodity-type business. ECNs could regulate the fairness of initial public offerings (IPOs), oversee Hambrecht's OpenIPO process, or measure the effectiveness of securities research and use transaction fees to subsidize small- and mid-cap research efforts.
Some[who?], however, believe the answer will be some combination of the best of technology and "upstairs trading" — in other words, a hybrid model.
Trading 25,000 shares of General Electric stock (recent[when?] quote: $34.76; recent[when?] volume: 44,760,300) would be a relatively simple e-commerce transaction; trading 100 shares of Berkshire Hathaway Class A stock (recent quote: $139,700.00; recent volume: 850) may never be. The choice of system should be clear (but always that of the trader), based on the characteristics of the security to be traded.
Even with ECNs forming an important part of a national market system, opportunities presumably remain to profit from the spread between the bid and offer price. That is especially true for investment managers that direct huge trading volume, and own a stake in an ECN or specialist firm. For example, in its individual stock-brokerage accounts, "Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market orders through the Boston Stock Exchange, where an affiliate controls a specialist post."
Fidelity says these arrangements are governed by a separate brokerage "order-flow management" team, which seeks to obtain the best possible execution for customers, and that its execution is highly rated.
Gordon growth model is a variant of the Discounted cash flow model, a method for valuing a stock or business. Often used to provide difficult-to-resolve valuation issues for litigation, tax planning, and business transactions that are currently off market. It is named after Myron Gordon, who was a professor at the University of Toronto.
It assumes that the company issues a dividend that has a current value of D that grows at a constant rate g. It also assumes that the required rate of return for the stock remains constant at k which is equal to the cost of equity for that company. It involves summing the infinite series which gives the value of price current P.
Summing the infinite series we get,
， In practice this P is then adjusted by various factors e.g. the size of the company.
， k denotes expected return = yield + expected growth.
It is common to use the next value of D given by D1 = D0(1 + g), thus the Gordon's model can be stated as 
Note that the model assumes that the earnings growth is constant for perpetuity. In practice a very high growth rate cannot be sustained for a long time. Often it is assumed that the high growth rate can be sustained for only a limited number of years. After that only a sustainable growth rate will be experienced. This corresponds to the terminal case of the Discounted cash flow model. Gordon's model is thus applicable to the terminal case.
Problems with the model:
a) The model requires one perpetual growth rate
- greater than (negative 1) and
- less than the cost of capital.
But for many growth stocks, the current growth rate can vary with the cost of capital significantly year by year. In this case this model should not be used.
b) If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock. One common technique is to assume that the Miller-Modigliani hypothesis of dividend irrelevance is true, and therefore replace the stocks's dividend D with E earnings per share.
But this has the effect of double counting the earnings. The model's equation recognizes the trade off between paying dividends and the growth realized by reinvested earnings. It incorporates both factors. By replacing the (lack of) dividend with earnings, and multiplying by the growth from those earnings, you double count.
c) Gordon's model is sensitive if k is close to g. For example, if
- dividend = $1.00
- cost of capital = 8%
- growth rate = 1% - 2%
So the price of the stock
- assuming 1% growth= $14.43 = 1.00(1.01/.07)
- assuming 2% growth= $17.00 = 1.00(1.02/.06)
The difference determined in valuation is relatively small.
Now say the
- growth rate = 6% - 7%
So the price of the stock
- assuming 6% growth= $53 = 1.00(1.06/.02)
- assuming 7% growth= $107 = 1.00(1.07/.01)
The difference determined in valuation is large.
We want to find out the value of Pn as , where
If g < k, then a < 1 and
Thus, we get
The dividend yield on a company stock is the company's annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage.
Preferred share dividend yield:
Dividend payments on preferred shares are stipulated by the prospectus. The company will typically refer to a preferred share by its initial name which is the yield on its original price — for example, a 6% preferred share. However, the price of preferred shares varies according to the market so the yield based on the current price fluctuates. Owners of preferred shares calculate multiple yields to reflect the different possible outcomes over the life of the security.
- current yield is the $Dividend / Pfd share current price.
- Since the share may be purchased at a lower (higher) cost than its final redemption value, holding it to maturity will result in a capital gain (loss). The annualized rate of gain is calculated using the Present value of a dollar calculation. ('PV' is the current stock price. 'FV' is the redemption value. 'n' is the number of years to redemption. Solve for the interest rate 'r'.) The yield to maturity is the sum of this annualized gain (loss) and the current yield.
- There are other possible yields discussed at Yield to maturity.
Unlike preferred stock, there is no stipulated dividend for common stock. Instead, dividends paid to holders of common stock are set by management, usually in relation to the company's earnings. There is no guarantee that future dividends will match past dividends or even be paid at all. Due to the difficulty in accurately forecasting future dividends, the most commonly-cited figure for dividend yield is the current yield which is calculated using the following formula:
For example, take a company which paid dividends totaling $1 last year and whose shares currently sell for $20. Its dividend yield would be calculated as follows:
Rather than use last year's dividend, some try to estimate what the next year's dividend will be and use this as the basis of a future dividend yield. Such a scheme is used for the calculation of the FTSE UK Dividend+ Index. It should be noted that estimates of future dividend yields are by definition uncertain.
Historically, a higher dividend yield has been considered to be desirable among investors. A high dividend yield can be considered to be evidence that a stock is under priced or that the company has fallen on hard times and future dividends will not be as high as previous ones. Similarly a low dividend yield can be considered evidence that the stock is overpriced or that future dividends might be higher.
Dividend yield fell out of favor somewhat during the 1990s because of an increasing emphasis on price appreciation over dividends as the main form of return on investments.
The importance of the dividend yield in determining investment strength is still a debated topic. The persistent historic low in the Dow Jones dividend yield during the early 21st century is considered by some bearish investors as indicative that the market is still overvalued.
The dividend yield of the Dow Jones Industrial Average, which is obtained from the annual dividends of all 30 companies in the average divided by their cumulative stock price, has also been considered to be an important indicator of the strength of the U.S. stock market. Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred during the stock market collapse of 1932, when it exceeded 15%.
With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.
In 1982 the dividend yield on the S&P 500 Index reached 6.7%. Over the following 16 years, the dividend yield declined to just a percentage value of 1.4% during 1998, because stock prices increased faster than dividend payments from earnings, and public company
earnings increased slower than stock prices. During the 20th century, the highest growth rates for earnings and dividends over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings. As of 2008, the average dividend yield is around 2%.
Earnings per share:
Earnings per share (EPS) are the earnings returned on the initial investment amount.
In the US, the Financial Accounting Standards Board (FASB) requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.
The EPS formula does NOT include preferred dividends for categories outside of continued operations and net income. Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS. Remember that preferred stock rights have precedence over common stock. If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.
Earnings Per Share (Basic Formula)
Earnings Per Share (Net Income Formula)
Earnings Per Share (Continuing Operations Formula)
Only preferred dividends actually declared in the current year are subtracted. The exception is when preferred shares are cumulative, in which case annual dividends are deducted regardless of whether they have been declared or not. Dividends in arrears are not relevant when calculating EPS.
American Stock Exchange:
The American Stock Exchange (AMEX) is an American
stock exchange situated in New York. AMEX is a mutual organization, owned by its members. Until 1929 it was known as the New York Curb Exchange. On 2008-01-17, NYSE Euronext announced it would acquire the American Stock Exchange for $260 million in stock.
The Exchange traces its roots back to colonial times when stock brokers created outdoor markets in New York City to trade new government issued securities. The AMEX started out in 1842 as such a market at the curbstone on Broad Street near Exchange Place. The curb brokers gathered around the lamp posts and mail boxes, resisting wind and weather, putting up lists of stocks for sale. As trading activity increased so did the volume of the transactions; the shouting reached such a high level that stock hand signals had to be introduced so that the brokers could continue trading over the din. In 1921 the market was moved indoors into the building at 86 Trinity Place, Manhattan, where it still resides. The hand signals remained in place for decades even after the move, as a means of covenient communication. The building was declared a National Historic Landmark in 1978.
AMEX's core business has shifted over the years from stocks to options and Exchange-traded funds, although it continues to trade small to mid-size stocks. An effort in the mid-1990s to initiate an Emerging Company Marketplace ended in failure, as the reduced listing standards (beyond the existing lenient AMEX standards) caused penny stock promoters to move their scams to a national exchange. In the mid 1990s the exchange was dogged by allegations of trading improprieties, which were highlighted by BusinessWeek in 1999. In 1998, the American Stock Exchange merged with the National Association of Securities Dealers (operators of NASDAQ) to create "The Nasdaq-Amex Market Group" where AMEX is an independent entity of the NASD parent company. After tension between the NASD and AMEX members, the latter group bought out the NASD and acquired control of the AMEX in 2004.
Out of the three major American stock exchanges, the AMEX is known to have the most liberal policies concerning company listing, as most of its companies are generally smaller compared to the NYSE and NASDAQ. The Amex also specialises in the trading of ETFs, and hybrid/structured securities. The majority of US listed ETF's are traded at the AMEX including the SPDR and most Powershares.
In 2005, the AMEX attempted to popularize an American implementation of the Canadian income trust model. Listed Equity Income Hybrid Securities, (more commonly known as Income Deposit Securities) listed on the AMEX are B & G Foods Holding Corp. (BGF), Centerplate, Inc. (CVP), Coinmach Service Corp. (DRY), and Otelco Inc. (OTT). Recently Coinmach Service Corp, has been attempting to restructure itself away from being an income trust.
The large companies listed on the AMEX include British American Tobacco (ADR) (BTI), Imperial Oil Limited (IMO), Seaboard Corporation (SEB) and Bio-Rad Laboratories (BIO). Seaboard is notable for not having split its shares since becoming publicly listed; shares of SEB trade for around $1,590 (2008-03-26).
The AMEX also produces stock market indices; perhaps the most notable of these is an index of stocks of internet companies now known as the Inter@ctive Week Internet Index. Recently, the AMEX has also developed a unique set of indices known as Intellidexes, which attempt to gain alpha by creating indices weighted on fundamental factors. The AMEX Composite, a value-weighted index of all stocks listed on the exchange, established a record monthly close of 2,069.16 points on November 30, 2006.
Located near the World Trade Center, the operation of the AMEX was temporarily affected by the September 11, 2001 attacks. The Exchange's operations were temporarily shifted to the Philadelphia Stock Exchange.
(New York Stock Exchange):
The New York Stock Exchange (NYSE), nicknamed the "Big Board", is a stock exchange based in New York City. It is the largest stock exchange in the world by dollar
volume and, with 2,764 listed securities, has the second most securities of all stock exchanges. It was the second biggest stock exchange in the world in terms of company listings, second only to NASDAQ with 3,200 companies, before the Bombay Stock Exchange (BSE) of India consolidated to become the biggest stock exchange in the world with 4,800 company listings as of August 2007. As of December 31, 2006, the combined capitalization of all New York Stock Exchange listed companies was $25.0 trillion.
The NYSE is operated by NYSE Euronext, which was formed by the NYSE's merger with the fully electronic stock exchange Euronext. The New York Stock Exchange trading floor is located at 11 Wall Street, and is composed of four rooms used for the facilitation of trading. A fifth trading room, located at 30 Broad Street, was closed in February 2007. The main building, located at 18 Broad Street between the corners of Wall Street and Exchange Place, was designated a National Historic Landmark in 1978.
The New York Stock Exchange gives an efficient method for buyers and sellers to trade
shares of stock in companies registered for public trading. The exchange provides price discovery via an auction environment designed to produce the fairest price for both parties. Since September 30, 1985, the NYSE trading hours have been 9:30–4:00 ET.
As of January 24, 2007, all NYSE stocks can be traded via its electronic Hybrid Market (except for a small group of very high-priced stocks). Customers can now send orders for immediate electronic execution, or route orders to the floor for trade in the auction market. In excess of 50% of all order flow is now delivered to the floor electronically.
On the trading floor, the NYSE trades in a continuous auction format. Here, the human interaction and expert judgment as to order execution differentiates the NYSE from fully electronic markets. There is one specific location on the trading floor where each listed stock trades. Exchange members interested in buying and selling a particular stock on behalf of investors gather around the appropriate post where a specialist broker, who is employed by an NYSE member firm (that is, he/she is not an employee of the New York Stock Exchange), acts as an auctioneer in an open outcry auction market environment to bring buyers and sellers together and to manage the actual auction. They do on occasion (approximately 10% of the time) facilitate the trades by committing their own capital and as a matter of course disseminate information to the crowd that helps to bring buyers and sellers together. The frenzied commotion of men and women in colored smocks has been captured in several movies, including Wall Street.
In the mid-1960s, the NYSE Composite Index (NYSE: NYA) was created, with a base value of 50 points equal to the 1965 yearly close, to reflect the value of all stocks trading at the exchange instead of just the 30 stocks included in the Dow Jones Industrial Average. To raise the profile of the composite index, in 2003 the NYSE set its new base value of 5,000 points equal to the 2002 yearly close. (Previously, the index had stood just below 500 points, with lifetime highs and lows of 670 points and 33 points, respectively.)
The right to directly trade shares on the exchange is conferred upon owners of the 1366 "seats". The term comes from the fact that up until the 1870s NYSE members sat in chairs to trade; this system was eliminated long ago. In 1868, the number of seats was fixed at 533, and this number was increased several times over the years. In 1953, the exchange stopped at 1366 seats. These seats are a sought-after commodity as they confer the ability to directly trade stock on the NYSE. Seat prices have varied widely over the years, generally falling during recessions and rising during economic expansions. The most expensive seat was sold in 1929 for $625,000, which, adjusted for inflation, is over six million in today's dollars. In recent times, seats have sold for as high as $4 million in the late 1990s and $1 million in 2001. In 2005, seat prices shot up to $3.25 million as the exchange was set to merge with Archipelago and become a for-profit, publicly traded company. Seat owners received $500,000 cash per seat and 77,000 shares of the newly formed corporation. The NYSE now sells one-year licenses to trade directly on the exchange.
The origin of the NYSE can be traced to May 17, 1792, when the Buttonwood Agreement was signed by 24 stock brokers outside of 68 Wall Street in New York under a buttonwood tree on Wall Street which earlier was the site of a stockade fence. On March 8, 1817, the organization drafted a constitution and renamed itself the "New York Stock & Exchange Board". (This name was shortened to its current form in 1863.) Anthony Stockholm was elected the Exchange's first president. (For other presidents, see List of presidents of the New York Stock Exchange.)
The first central location of the NYSE was a room rented for $200 a month in 1817 located at 40 Wall Street. The NYSE was destroyed in the Great Fire of New York (1835). It moved to a temporary headquarters. In 1863 it changed its name to the New York Stock Exchange (NYSE). In 1865 it moved to 10-12 Broad Street. The Dow Joes Industrial Average (DJIA) was created by Dow Jones & Company, a financial news publisher, in 1896.
Volume of stocks traded had increased sixfold in the years between 1896 and 1901 and a larger space was required to conduct business in the expanding marketplace. Eight New York City architects were invited to participate in a design competition for a new building and the Exchange selected the neoclassic design from architect George B. Post. Demolition of the existing building at 10 Broad Street and the adjacent lots started on 10 May
The New York Stock Exchange building opened at 18 Broad Street on April 22, 1903 at a cost of $4 million. The trading floor was one of the largest volumes of space in the city at the time at 109 x 140 feet (33 x 42.5 m) with a skylight set into a 72-foot (22 m) high ceiling. The main façade of the building features marble sculpture by John Quincy Adams Ward in the pediment, above six tall Corinthian capitals, called "Integrity Protecting the Works of Man". The building was listed as a National Historic Landmark and added to the National Register of Historic Places on June 2, 1978.
In 1922, a building designed by Trowbridge & Livingston was added at 11 Broad Street for offices, and a new trading floor called "the garage". Additional trading floor space was added in 1969 and 1988 (the "blue room") with the latest technology for information display and communication. Another trading floor was opened at 30 Broad Street in 2000. With the arrival of the Hybrid Market, a greater proportion of trading was executed electronically and the NYSE decided to close the 30 Broad Street trading room in early 2006. In late 2007 the exchange closed the rooms created by the 1969 and 1988 expansions due to the declining number of traders and employees on the floor, a result of increased electronic trading.
The 11 Wall Street building was designated a National Historic Landmark in 1978.
On September 16, 1920, a bomb exploded on Wall Street outside the NYSE building, killing 33 people and injuring more than 400. The perpetrators were never found. The NYSE building and some buildings nearby, such as the JP Morgan building, still have marks on their facades caused by the bombing.
The Black Thursday crash of the Exchange on October 24, 1929, and the sell-off panic which started on Black Tuesday, October 29, are often blamed for precipitating the Great Depression of 1929. In an effort to try to restore investor confidence, the Exchange unveiled a fifteen-point program aimed to upgrade protection for the investing public on October 31, 1938.
On October 1, 1934, the exchange was registered as a national securities exchange with the U.S. Securities and Exchange Commission, with a president and a thirty-three member board. On February 18, 1971 the non-profit corporation was formed, and the number of board members was reduced to twenty-five.
On October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped 508 points, a 22.6% loss in a single day, the biggest one-day drop the exchange had yet experienced, prompting officials at the exchange to invoke for the first time the "circuit breaker" rule to halt all trading. This was a very controversial move and led to a quick change in the rule; trading now halts for an hour, two hours, or the rest of the day when the DJIA drops 10, 20, or 30 percent, respectively. In the afternoon, the 10% and 20% drops will halt trading for a shorter period of time, but a 30% drop will always close the exchange for the day. The rationale behind the trading halt was to give investors a chance to cool off and reevaluate their positions. Black Monday was followed by Terrible Tuesday, a day in which the Exchange's systems did not perform well and some people had difficulty completing their trades.
There was a panic similar to many with a fall of 7.2% in value (554.26 points) on October 27, 1997 prompted by falls in Asian markets, from which the NYSE recovered quickly.
On September 17, 2003, NYSE chairman and chief executive Richard Grasso stepped down as a result of controversy concerning the size of his deferred compensation package. He was replaced as CEO by John S. Reed, the former Chairman of Citigroup.
The NYSE announced its plans to acquire Archipelago on April 21, 2005, in a deal intended to reorganize the NYSE as a publicly traded company. NYSE's governing board voted to acquire rival Archipelago on December 6, 2005, and become a for-profit, public company. It began trading under the name NYSE Group on March 8, 2006. A little over one year later, on April 4, 2007, the NYSE Group completed its merger with Euronext, the European combined stock market, thus forming the NYSE Euronext, the first transatlantic stock exchange.
Lahore Stock Exchange was established in October 1970 and is the second largest stock exchange in the country with a market share of around 12-16% in terms of daily traded volumes. LSE has 519 companies, spanning 37 sectors of the economy, that are listed on the Exchange with total listed capital of Rs. 555.67 billion having market capitalization of around Rs. 3.64 trillion. LSE has 152 members of whom 81 are corporate and 54 are individual members.
Activities of Lahore Stock Exchange (LSE) have increased significantly in all operational areas since its inception. Over the years, LSE has successfully met various challenges and has now emerged, fully geared and positioned to aggressively compete with its fellow Exchanges, contributing towards the growth of Capital Markets in Pakistan.
Important Developments over the Past Years:
A number of significant initiatives have been taken to improve the regulatory regime and the trading environment for the benefit of Institutional Investors as well as listed companies. Although the list of such initiatives is exhaustive, below some of these incentives are touched upon;
- LSE was the first Exchange in the country to undertake automation of trading at the exchanges in 1994. LSE has made large investments in technology & automation to keep pace with globalization of securities trading. The Exchange is fully committed to providing a transparent, efficient, fair and investor friendly environment for the benefit of Investors and Issuers. The goal is to bring LSE up to international standards in operational, technical, regulatory and quality management areas and to ensure that not only domestic but also foreign investors are attracted.
- LSE has made direct investment in Pakistan Credit Rating Agency (Pvt) Ltd. (PACRA), Central Depository Company Ltd. (CDC), National Clearing Company of Pakistan Ltd. (NCCPL), and National Commodity Exchange Ltd. (NCEL), all of which play a central role in developing the infrastructure around the financial markets of Pakistan. In addition, LSE is an active member of the Federation of Euro-Asian Stock Exchanges (FEAS) and the South Asian Federation of Exchanges (SAFE), helping to expand its outreach, presence and profile beyond the boundaries of Pakistan.
- LSE was the first Exchange in Pakistan to offer Internet based trading to its members in the year 2001. It enables the brokers to reach out to the untapped retail markets. Currently, more than 50% of the total trading volume at the LSE originates from Internet trading terminals. The aim of this measure is to transform the LSE from a regional to a national player over a period of time.
- LSE has increased its geographical outreach by establishing its branches in other cities of the Province. Two such branch offices have become operational in Faisalabad and Sialkot. Similar Offices in other cities are also being contemplated. LSE's trading system has already been modified to connect branch offices in real-time fashion. There is a growing need for remote trading terminals reflecting the confidence of traders in the use of stable Internet Trading Systems.
- LSE has improved the quality of operations and upgraded them to modern international standards. This has included upgrading LSE's IT infrastructure, updating regulations and procedures to incorporate existing and expected technological changes, as well as reorganizing and restructuring the workforce. As a result, LSE's capabilities as both a front-line regulatory body and a service organization have been significantly enhanced.
- LSE has successfully launched Unique Identification Number (UIN) System with an objective to bring more efficiency and transparency to the stock business and to improve the surveillance and monitoring capacity of the Exchange.
- LSE has implemented a regular timetable for the Broker System Audit, in order to build investors' confidence. Also, LSE has taken effective risk and exposure management measures including the implementation of a fully automated in-house developed Trade Risk Filter (TRF) to efficiently monitor members' pre-trading exposures on a real time basis. This has been a quantum leap for LSE in improving its risk management systems.
A visible trend at the LSE has been the increasing number of corporate members. It is heartening to note that part of this increase has been due to the entry of investment banks/financial institutions (or their subsidiaries) as members of the Exchange. An overview of this trend over the past years is as follows:
LSE's MEMBERSHIP STRUCTURE:
*As of May 31st, 2007
- The above trend has led to record trading volumes as well as an improved product offering. The measures at LSE have attempted to create an atmosphere, which is more conducive and transparent for investment. The investing public has received the reforms very positively.
- LSE Training Institute specifically dedicated to the Capital Markets, is the first of its kind in Pakistan and was established in 2006. Formal courses have been introduced to provide trained human resources for the capital markets. It has also launched a series of Education Programs with a view to educate the brokers, agents and general public about the securities market and its laws. In an effort to promote the education sector, particularly in relation to financial markets, LSE is providing scholarships to deserving students of Lahore University of Management Sciences (LUMS). LSE encourages universities and colleges to come and visit LSE.
- In another trend-setting example, Lahore Stock Exchange and Islamabad Stock Exchange have joined hands to establish a Unified Trading Platform which will help to bring increased liquidity in the market, improve price discovery, maximize transparency, increase turnover, broaden investor base, curtail risks and distortions in trade, provide cost effective service to the investing public and enhance the image of both the Exchanges.
As part of second generation capital market reforms being pursued by the Securities & Exchange Commission of Pakistan, demutualization is being seriously considered by the members of the exchanges and hopefully that during the year 2007 a decision will be taken in the best interest of the capital markets of the country. Demutualization is in line with international standards, which will ensure that the exchange truly and fairly represents the interests of all stakeholders.
- Ethical Behavior
- Freedom through responsibility
- Good Governance
- Innovation and Enterprising Spirit
- Perseverance in Pursuit of Commitment
- Professional Integrity
- Strategic vision in Planning
- Team Work
- Valuing People
LSE-25: The Lahore Stock Exchange Twenty Five company index also calculates the performance of stocks assuming that all rights issues and bonus share issues only increase the listed capital. In the case of bonuses or rights the prices of the shares are not adjusted as they are in the case of the LSETRI. However, the LSE25 assumes that dividends paid out by a component company are not reinvested. In summary, in the LSE25, no price adjustments are made when any component company issues cash dividends.
The Lahore Stock Exchange Total Return Index calculates the performance of stocks assuming that all payouts are reinvested in the index on the ex-date. The LSETRI assumes that if a component company issues bonus shares or announces a rights issue it will increase the listed capital. Additionally, the LSETRI also assumes that all pay-outs by a component company are 100% reinvested in the index. Therefore, the LSETRI is adjusted against such payouts announced by any of index constituents on its ex-date allowing the index value to remain comparable over time.
Karachi Stock Exchange
The Karachi Stock Exchange or KSE is a stock exchange located in Karachi, Sindh, Pakistan. Founded in 1947, it is Pakistan's largest and oldest stock exchange, with many Pakistani as well as overseas listings. Its current premises are situated on Stock Exchange Road, in the heart of Karachi's Business District.
- Established on September 18,1947
- Incorporated March 10, 1949
- Premier Stock exchange of the country
- Started with 5 companies with a paid up capital of Rs. 37 million
- Trading was done through an open-out-cry system
- The first index was the KSE 50 Index
- Exchange owned by 200 members
- 654 companies listed
- 3 indices
- KSE 30
- KSE All Shares Index
- Trading currently through an Electronic Trading System
- Market capitalization*: US $ 70.18 billion
- Paid up Capital*: Rs. 671,269.47 million
- In the year 2007, KSE 100 Index showed a return of 40.19%
- Publicly Listed Company with strategic investor
- Products to include:
- Index Trading
- New indices (e.g. Islamic Index, Sector Indices)
- Broad based investor participation
- Increased float of existing traded companies becoming a Regional Hub for source of Capital
- Cross-listings of companies and trading of indices
The KSE 100 Index has witnessed a compounded annual growth rate of 34% over the past 10 years
CAGR from June 30, 1998 to Dec 31, 2007 = 34%
KSE 100 is a capital weighted index consisting of 100 companies representing 85% of the total market capitalization of the Exchange.
Current KSE Products/Markets
Cash Settled Futures
30, 60 & 90 Days
COT (Stopped in 2006)
CFS (Replaced COT)
KSE faces a number of challenges due to:
- Decreasing volumes
- Limited number of products
- Narrow Market
- Limited Free Float
- Few Investors
- High volumes are seen in only 20/30 stocks
The introduction of Derivatives can:
- Increase Volumes
- By introducing new products into the market
- Provide Investors with a means to hedge against risk
- Generate interest amongst investors and the public thereby increasing the investor base
KSE plans to introduce Derivatives in the near future:
Sector Index Trading
We expect that within 5 years, the volume of trades in
Derivatives will reach 50%of the total trading volume at the KSE
What are Derivatives?
- A Derivative is an instrument whose value depends on the value of an existing financial contract or commodity (gold, bond, stock, stock index, etc.)
- Universe of Product includes ETF and OTC (Over the counter) markets.
- Futures, Forwards, Options and Swaps are the main types of Derivatives.
- The payment between counterparties is dependant on the behaviour and performance of the underlying asset.
- Futures contracts were originally traded on livestock and agricultural commodities.
- Today, Futures contracts are used for petroleum, precious metals, foreign currencies, different debt instruments, individual stocks, stock indexes, and even the weather.
- Most contracts end up being settled with an offsetting trade, and not with the actual delivery of the underlying asset.
- National Commodity Exchange Limited, Pakistan's first demutualized exchange, has only settled two delivery backed contracts.
- Some analysts suggest that the March 2005 crisis was due to delivery pressures on account of Deliverable Future Contracts, concluding in the fourth week of March 2005
- In order to prevent of another crisis, the Securities & Exchange Commission advised the KSE to introduced Cash Settled Futures
- KSE introduced Non-Deliverable Future Contracts in 2007
- Non-Deliverable Futures have not gained momentum at KSE owing to a absence of price discovery & convergence mechanics
- This is due to the presence of scrip level circuit breakers, as opposed to Market halts
- An Option gives its owner the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at its exercise price or strike price after a fixed period of time – until the option's expiration date.
- The buyer of a call option expects the price of the underlying instrument to rise in the future; the seller either expects that the price of the underlying instrument will fall, or is willing to give up some of the upside (profit) from a price rise in return for:
- the premium (paid immediately) plus
- retaining the opportunity to make a gain up to the strike price
- A swap is when two counterparties agree to exchange one stream of cash flows against another stream.
- These streams are called legs of the swap
- Cash flows are calculated over a notational principal amount, which is usually not exchanged between counterparties.
- Swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral
- Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in underlying prices.
Derivatives, Key Benefits:
- Derivatives are used to protect assets from drastic fluctuations.
- They play a vital role in managing the risk of underlying securities such as interest rate assets or liability positions.
- Traders in financial derivative markets do not trade in the publics interest but trade to seek profits or to manage risk.
- Their financial models do however help the markets in future price discovery
- So the information about future prices that derivative markets provide for the public is purely an unintended social benefit.
- Further, this benefit is provided free of charge by derivative markets to the public at large who can simply observe prices that are reported from derivatives markets to gain insight into the future direction of prices.
Investment Assets are assets held by a significant number of people purely for investment purposes (Gold, Silver)
Are assets held primarily for consumption purposes (Sugar, Wheat, Oil , Copper)
With a Perfect Financial Derivatives market, the future values of commodities are known and are predictable
In terms of the recent Wheat and Sugar Crises, things may have been different!
Derivatives are purely speculative and highly leveraged
If it is not bad, then its not news at all
Stories in the press tend to focus more on the misuse of derivatives, rather than on how they are used legitimately
Derivatives have a negative image
Investor's have misconceptions about Derivatives due to:
Misconceptions about Derivatives:
Derivatives, Risk Reduction & Risk Management
Certain businesses know that they would need to borrow or lend on a future date such as a home builder and saving institutions.
Both parties can use interest rates of future markets to reduce uncertainty about interest rates
Traders can use derivatives markets to reduce the risk of ordinary business!
A stock market, or (equity market), is a private or public market for the trading of company
stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
The expression "stock market" refers to the market that enables the trading of company stocks collective shares, other Security finance|securities, and Derivative finance|derivatives. Bonds are still traditionally traded in an informal, Over-the-counter finance|over-the-counter market known as the bond market. Commodities are traded in commodities markets, and derivatives are traded in a variety of markets but, like bonds, mostly 'over-the-counter.
The size of the worldwide "bond market" is estimated at $45 trillion. The size of the stock market is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion face or nominal value, 30 times the size of the U.S. economy…and 12 times the size of the entire world economy. It must be noted though that the value of the derivatives market, because it is stated in terms of Notional amount|notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an Actual cash value|actual value. Many such relatively illiquid securities are valued as mark to model|marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the New York Stock Exchange|NYSE, the NASDAQ, the American Stock Exchange|Amex, as well as on the many regional exchanges, e.g. OTC Bulletin Board|OTCBB and Pink Sheets. European examples of stock exchanges include the Paris Bourse now part of Euronext, the London Stock Exchange and the Deutsche Borse.
Participants in the stock market range from small individual stock investors to large hedge fund
traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order.
Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders.
Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the exchange may be traded. Orders enter by way of exchange members and flow down to a specialist, who goes to the floor trading post to trade stock. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place--in this case the specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant amount of human contact in this process, computers play an important role, especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange. However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.
Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions.
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions).
However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.
Historian Fernand Braudel suggests that in Cairo in the 11th century
Muslim and Jewish merchants had already set up every form of trade association and had knowledge of many methods of credit and payment, disproving the belief that these were invented later by Italians. In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. In late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurse, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting. The idea quickly spread around Flanders and neighboring counties and "Beurzen" 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. Bankers in Pisa, Verona, Genoa and Florence 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.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, Canada, China (Hongkong), India, UK, Germany, France and Japan.
Importance of stock market:
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'être of central banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction.
The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.
Relation of the stock market to the modern financial system:
The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 per cent of households' financial wealth, compared to less than 20 per cent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.
The stock market, individual investors, and financial risk:
Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).
With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtalking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.
This is a quote from the preface to a published biography about the long-term value-oriented stock investor
Warren Buffett. Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st.
From experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur—so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have been put forward against the notion that financial markets are efficient.
According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this largely theoretic academic viewpoint also predicts that little or no trading should take place—contrary to fact—since prices are already at or near equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent—the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search failed to detect any specific or unexpected development that might account for the crash. It also seems to be the case more generally that many price movements are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period confirms this. Moreover, while the EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer.
Various explanations for large price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact.
Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.
Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.
In one paper the authors draw an analogy with gambling. In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically.
The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the recent Nasdaq crash, less than 1 per cent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 crash, the average did not rise above 5%). The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)
Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself. Therefore, the stock market can be swayed tremendously in either direction by press releases, rumors, euphoria and mass panic.
Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to predict.
Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed. In the preface to this edition, Shiller warns that "[t]he stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing , in the mid-20s, far higher than the historical average. … People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."
Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1). The horizontal axis shows the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-coded as shown in the key. See also ten-year returns. Shiller states that this plot "confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the stock market when it is high, as it has been recently, and get into the market when it is low."
A stock market crash is often defined as a sharp dip in share prices of equities listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is also due to panic. Often, stock market crashes end up with speculative economic bubbles.
There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing number of people are involved in the stock market, especially since the social security and retirement plans are being increasingly privatized and linked to stocks and bonds and other elements of the market. There have been a number of famous stock market crashes like the Wall Street Crash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000. But those stock market crashes did not begin in 1929, or 1987. They actually started years or months before the crash really hit hard.
One of the most famous stock market crashes started October 24, 1929 on Black Thursday. The Dow Jones Industrial lost 50% during this stock market crash. It was the beginning of the Great Depression. Another famous crash took place on October 19, 1987 – Black Monday. On Black Monday itself, the Dow Jones fell by 22.6% after completing a 5 year continuous rise in share prices. This event not only shook the USA, but quickly spread across the world. Thus, by the end of October, stock exchanges in Australia lost 41.8%, Canada lost 22.5%, Hong Kong lost 45.8% and Great Britain lost 26.4%. Names "Black Monday" and "Black Tuesday" are also used for October 28-29,1929, which followed Terrible Thursday – starting day of the stock market crash in 1929. The crash in 1987 raised some mysticism – main news or events did not predict the catastrophe and visible reasons for the collapse were not identified. This event had put many important assumptions, of modern economics, under uncertainty, namely, the theory of rational conduct of human being, the theory of market equilibrium and the hypothesis of market efficiency. For some time after the crash, trading in stock exchanges worldwide was halted, since the exchange's computers did not perform well owing to enormous quantity of trades being received at one time. This halt in trading allowed the Federal Reserve system and central banks of other countries to take measures to control the spreading of worldwide financial crisis. In the United States the SEC introduced several new measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday. Computer systems were upgraded in the stock exchanges to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin requirements in an attempt to lower the volatility of common stocks, stock options and the futures market. The New York Stock Exchange and the Chicago Mercantile Exchange introduced the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time.
The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization (the total market value of floating capital of the company) weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges (which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or traded over-the-counter. As all of these products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market.
Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.
In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets.
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim).
Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion.
One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control and diversification.
Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%/year, compounded annually, since World War II).
According to each national or state legislation, a large array of fiscal obligations must be respected regarding capital gains, and taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in particular in the stock exchanges. However, these fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes companies pay to the state, or that tax free stock market operations are useful to boost economic growth.
Twenty Major Stock Exchanges In The World: Market Capitalization & Year-to-date Turnover at the end of October 2007
Total Share Turnover
Milan Stock Exchange (Borsa Italiana)
Note 1: includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges
Note 2: latest data available is at the end of June 2007
Note 3: latest data available is at the end of September 2007
The main stock exchanges:
Types of stocks
Stock exchange ·