I. Stock (business)
Stock (business), in business and finance, a specific type of negotiable instrument or security, although the term does have other meanings. In everyday usage, stocks are treated as being identical with securities and shares of ownership in a company or corporation, but, properly speaking, stocks are securities with specific characteristics. Their value is quoted in monetary amounts, and they bear a fixed rate of interest, while shares are quoted in proportions of the total capital of a company and may have variable rates of interest. Stocks are frequently issued by local or central governments to raise revenue, and government stocks are regarded as a solid and low-risk form of investment because they are backed by the credit of the government. Also, the total accumulated goods held by a company, whether already made or in the process of manufacture, may be termed its stock. The capital stock of a company or country is its total quantity of material capital.
II. Black Monday
Black Monday, October 19, 1987, day on which stock market prices in the United States declined precipitously, accelerating steep losses in stock markets around the world, including London and Tokyo. By the end of the day the Dow-Jones Industrial Average had fallen more than 500 points, representing a loss of more than 22.5 per cent in the value of its stocks. Economic observers blamed the crash on such factors as lack of international trade leadership by the federal government, underlying weaknesses in the US economy, and computerized trading on Wall Street, which triggered sell orders automatically.
The crash had been preceded by severe declines in the bond market since the spring and a flattening out of the rise in stock market averages. In mid-October the New York State Exchange underwent three days of sharply falling Dow-Jones averages before Black Monday’s precipitous decline. During the week following Black Monday the crisis eased, and by the end of 1987 the stock market averages were slightly ahead of their totals at the end of 1986.
III. Stock Exchange
Stock Exchange, also known as course, organization that facilitates the trade in company shares or other types of securities, such as bonds, unit trusts, and derivative products. Today, they fulfill several objectives: allowing a company to raise capital by floating its stock (often known as an “initial public offering”, or IPO); giving investors a way to participate in a company’s success by sharing in their profits (through share price appreciation and dividends); and allowing access to securities covering more esoteric investments such as commodities or pooled investments. Increasingly, stock exchanges such as Deutsche Börse, based in Frankfurt, provide more than just a trading venue, and can offer transaction settlement services, provision of market information, as well as the development and operation of electronic trading systems.
For a company to raise cash for investment or day-to-day operations, it can either borrow through the banking system or issue stocks or bonds. This issuance takes place in the primary market, which involves large investment banks and investors purchasing these shares through an IPO. Subsequent trading of these shares or bonds takes place on the secondary market, through the stock exchange. Exchanges have regulations to which companies must conform in order to be allowed to use their facilities. These rules differ but generally include the publication of audited accounts, announcement of corporate actions, and payment of dividends. While there have been stock market crashes and scandals in the past, the greater level of regulation and oversight by institutions mean such occurrences are rarer. However, because some exchanges have higher levels of regulation and listing requirements than others, they may be more attractive for a company to list on. These requirements may be based on company size in terms of income or capital worth and how long it has been trading.
Since the 1980s, many developments in the structures and operations of stock exchanges have seen them hugely changed from the time of their inception. The earliest form of a stock exchange is believed to have emerged in France in the 12th century, and was primarily based on the central trading of government-issued securities. Unofficial markets existed across Europe through to the 17th century, and the Amsterdam Stock Exchange, opened in 1602, is credited as having been the first to have issued and traded shares in a company—the Dutch East India Company. The London Stock Exchange (LSE) is one of the world’s oldest and largest. It started in the coffee-houses of London in the 17th century. By 1761 groups of stockbrokers had formed a club to trade shares and 12 years later they built their own exchange with coffee-shop above. By 1801, it had reopened under a membership basis and London’s first regulated stock exchange began.
As competition between exchanges has developed, the trading systems of stock exchanges have divided into two broad categories. First, in order to reduce volatility and increase share liquidity, many exchanges use the “market-maker” or “liquidity provider” system. There are variations on how this system works but essentially a market-maker is a financial company that provides a price at which it is prepared to buy and sell each share. It can make money on the “turn”, which is the difference between the sell and the buy price, and is known as the spread. Usually the largest of the companies traded on an exchange in terms of capitalization do not have market-markers. Exchange regulations dictate that the best of these quoted prices are used when an investor’s order to buy or sell shares goes to a stockbroker, who in turn passes the deal on to a market-maker who will execute it. All the prices are visible on computer screens, and market-makers are committed to honouring their prices for trades up to a certain size (the “normal market size”, or NMS).
The second type of trading is the “auction” system, which has a matched-bargain or order-driven basis whereby all buy-and-sell orders from investors are collected together and matched, with the price being set to attempt to clear the market.
Individual countries seem loath to give up their domestic stock exchanges, although as financial markets are now so liberalized, and as information technology develops further, there is nothing to stop individual investors using whichever stock exchange system is the cheapest or most efficient.