A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and dividends. Securities traded on a stock exchange include shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets are electronic networks, which gives them advantages of increased speed and reduced cost of transactions. Trade on an exchange is by members only.
In recent years stock exchanges have been increasingly diversifying their operations into related business areas such as derivatives trading, post-trading services and software sales. This trend can be observed most notably among profit-oriented trading venues. While the pursuit for diversification is likely to be driven by the attractiveness of these investment opportunities, it is yet an open question whether certain integration activities are also efficient, both from a social welfare and from the exchanges' perspective. Academic contributions so far analyzed different business models primarily from the former perspective, whereas there is only little literature considering their impact on the exchange itself. By employing a panel data set of 28 stock exchanges for the years 1999-2003, exchanges that diversify into related activities are mostly less efficient than exchanges that remain focused on the cash market. In particular vertically integrated exchanges are more efficient. However, they seem to possess a substantially stronger factor productivity growth than other business models. Integration activity comes at the cost of increased operational complexity which outweigh potential synergies between related activities and therefore leads to technical inefficiencies.
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 that, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global market for securities.
Among many other things, the Code of Hammurabi recorded interest-bearing loans.
Securities markets took centuries to develop. The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company's founding in 1602, while others point to earlier developments. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back as ancient Rome.
Role of stock exchanges
Stock exchanges have multiple roles in the economy. This may include the following
Raising capital for businesses
The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.
Common forms of capital raising
Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit or a loan, there are four common forms of capital raising used by companies and entrepreneurs. Most of these available options, might be achieved, directly or indirectly, involving a stock exchange.
Going public
Capital intensive companies, particularly high tech companies, always need to raise high volumes of capital in their early stages. For this reason, the public market provided by the stock exchanges, has been one of the most important funding sources for many capital intensive startups. After the 1990s and early-2000s hi-tech listed companies' boom and bust in the world's major stock exchanges, it has been much more demanding for the high-tech entrepreneur to take his/her company public, unless either the company already has products in the market and is generating sales and earnings, or the company has completed advanced promising clinical trials, earned potentially profitable patents or conducted market research which demonstrated very positive outcomes. This is quite different from the situation of the 1990s to early-2000s period, when a number of companies (particularly Internet boom and biotechnology companies) went public in the most prominent stock exchanges around the world, in the total absence of sales, earnings and any well-documented promising outcome. Anyway, every year a number of companies, including unknown highly speculative and financially unpredictable hi-tech startups, are listed for the first time in all the major stock exchanges - there are even specialized entry markets for this kind of companies or stock indexes tracking their performance (examples include the Alternext, CAC Small, SDAX, TecDAX, or most of the third market companies).
Limited partnerships
A number of companies have also raised significant amounts of capital through R&D limited partnerships. Tax law changes that were enacted in 1987 in the United States changed the tax deductibility of investments in R&D limited partnerships. In order for a partnership to be of interest to investors today, the cash-on-cash return must be high enough to entice investors. As a result, R&D limited partnerships are not a viable means of raising money for most companies, specially hi-tech startups.
Venture capital
A third usual source of capital for startup companies has been venture capital. This source remains largely available today, but the maximum statistical amount that the venture company firms in aggregate will invest in any one company is not limitless (it was approximately $15 million in 2001 for a biotechnology company).[5] At those level, venture capital firms typically become tapped-out because the financial risk to any one partnership becomes too great.
Corporate partners
A fourth alternative source of cash for a private company is a corporate partner, usually an established multinational company, which provides capital for the smaller company in return for marketing rights, patent rights, or equity. Corporate partnerships have been used successfully in a large number of cases.
Mobilizing savings for investment
When people draw their savings and invest in shares (through a IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms. Sometimes it is very difficult for the stock investor to determine whether or not the allocation of those funds is in good faith and will be able to generate long-term company growth, without examination of a company's internal auditing.
Facilitating company growth
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.
Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders.
Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders, and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors).
Despite this claim, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the late 1990s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General Motors (2009) and Satyam Computer Services (2009) were among the most widely scrutinized by the media.
However, when poor financial, ethical or managerial records are known by the stock investors, the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams.
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 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, in the short term, to directly tax citizens to finance development—though by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.
Barometer of the economy
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.
Speculation
The stock exchanges are also fashionable places for speculation. In a financial context, the terms "speculation" and "investment" are actually quite specific. For instance, although the word "investment" is typically used, in a general sense, to mean any act of placing money in a financial vehicle with the intent of producing returns over a period of time, most ventured money—including funds placed in the world's stock markets—is actually not investment but speculation.
World's Major stock exchanges
New York Stock Exchange, New York City
London Stock Exchange, the City of London
Tokyo Stock Exchange, Tokyo
Hong Kong Stock Exchange, Hong Kong
Shanghai Stock Exchange, Shanghai
Toronto Stock Exchange, Toronto
Bolsa de Madrid, Madrid
Bombay Stock Exchange, Mumbai
Sao Paulo Stock Exchange, Sao Paulo
Australian Securities Exchange's Sydney exchange centre, Sydney
Frankfurt Stock Exchange, Frankfurt
Paris Stock Exchange, Paris
SWX Swiss Exchange, Zurich
Mexican Stock Exchange, Mexico City
Borsa Italiana, Milan
“Ethics” can be defined as the critical, structured examination of how we should behave — in particular, how we should constrain the pursuit of self-interest when our actions affect others.
business - the principal activity in your life that you do to earn money; "he's not in my line of business"
business - incidental activity performed by an actor for dramatic effect; "his business with the cane was hilarious"
I’ve been wondering about the definition of ethics given here, as constraints on self-interest, when the philosophy of personal identity seems to have a hard time defining a personal identity that could function as an extension for the ‘self’ (whose interest is at odds with that of the public)*.
Now, I’ve been corrected by my biggers and betters for suggesting there might not be a workable distinction between ethics and prudence. Indeed, it was not until I got to SMU that I was even aware of such a distinction. It seemed pretty reasonable to me that, given the tendency to use “morals” and “ethics’ interchangeably, and to label certain behaviours only affecting the self as “immoral” or “unethical”, one could have competing self-interests as well as conflicts between groups and there members.
It seems to me that it would be useful to take your working definition of ethics and to contrast it with definitions operating with different auxiliary theories, of personal identity and other disputable notions. I agree that it’s useful to have a common definition to use as a starting point for a constructive discussion, but my experience is that such attempts at common ground often become an orthodoxy, and get used to quash dissent or to dismiss objections as merely skeptical.
*At least according to a gentleman who presented at a colloquium about the state of philosophy of personal identity at Dal while I was at SMU, I forget his name but it’s easily looked up.
Thanks. This needs to be said, and emphasized. I often present Carroll’s famous CSR pyramid (which has ethics as a part of CSR) as a transition to a different model which has ethics as a foundation for legal, social and economic “responsibilities”, claiming to my students that ethics is what grounds these other components of CSR. I take it that this is consistent with your suggestion. Citizenship is another matter, but there, too, it seems like a comparable move is possible, grounding notions of citizen rights and responsibilities in terms of some prior ethical commitments.
Beverly:
Fair question.
For casual purposes, we can indeed use those words interchangeably. So we can either say “You have an ethical obligation to do x” or “You have a moral obligation to do x” and mean the same thing.
But there is a difference between a norm being prevalent in a community and a norm being well-justified, and so sometimes we want to use different words to point out that distinction. We don’t always need the technical distinction, but it can be handy.
It’s also interesting to note that you very often hear it said that such-and-such is “morally and ethically wrong”, and in most cases the speaker has absolutely no idea what they mean by that.