Market participants

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.'

History

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 every method 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.
The Bombay Stock Exchange in India.
The Bombay Stock Exchange in India.

Importance of stock market

Function and purpose

The stock market is one of the most important sources for companies to raise money. This allows

businesses to go public, or raise additional capital for expansion. 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.