stock exchange

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stock exchange,

organized market for the trading of stocks and bonds (see bondbond,
in finance, usually a formal certificate of indebtedness issued in writing by governments or business corporations in return for loans. It bears interest and promises to pay a certain sum of money to the holder after a definite period, usually 10 to 20 years.
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; stockstock,
in finance, instrument certifying to shares in the ownership of a corporation. Bonds are similar evidences of shares in a loan to a corporation. Stock yields no dividends until claims of bondholders have been met.
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). Such markets were originally open to all, but at present only members of the owning association may buy and sell directly. Members, or stock brokersbroker,
one who acts as an intermediary in a sale or other business transaction between two parties. Such a person conducts individual transactions only, is given no general authority by the employers, discloses the names of the principals in the transaction to each other, and
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, buy and sell for themselves or for others, charging commissions for their services. A stock may be bought or sold only if it is listed on an exchange, and it may not be listed unless it meets certain requirements set by the exchange's board of governors. However, stocks listed on one exchange may be sold on other exchanges through an intermarket system, and since 2007 U.S. government regulations require that an order for a stock placed with an exchange be routed to the exchange or network that offers the best price. There are stock exchanges in all important financial centers of the world; the New York Stock Exchange (NYSE, in nearly continuous operation since 1792) is the largest in the world. Tokyo, London, and Frankfurt also have major facilities. Euronext, an inter-European exchange that merged with the NYSE from 2007 to 2014, combines facilities in Amsterdam, Brussels, Paris, and other cities is also significant.

By providing a ready market for the exchange of securities, stock exchanges greatly facilitate the financing of business through flotation of stocks and bonds. However, speculationspeculation,
practice of engaging in business in order to make quick profits from fluctuations in prices, as opposed to the practice of investing in a productive enterprise in order to share in its earnings.
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 in stocks can sometimes accentuate the instability of an economy. The reality of the Great DepressionGreat Depression,
in U.S. history, the severe economic crisis generally considered to have been precipitated by the U.S. stock-market crash of 1929. Although it shared the basic characteristics of other such crises (see depression), the Great Depression was unprecedented in its
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 was emphasized by the stock market crash in 1929. The interstate sale of securities and certain stock exchange practices in the United States are regulated by federal laws administered by the Securities and Exchange CommissionSecurities and Exchange Commission
(SEC), agency of the U.S. government created by the Securities Exchange Act of 1934 and charged with protecting the interests of the public and investors in connection with the public issuance and sale of corporate securities.
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. Today, a large percentage of stocks are traded through such over-the-counterover-the-counter,
method of buying and selling securities outside the organized stock exchange. Unlike an organized stock exchange, the over-the-counter market is composed of dealers who negotiate most transactions by telephone and computer.
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 organizations as NASDAQ (National Association of Securities Dealers Automatic Quotations) and its European equivalent, NASDAQ Europe (formerly Easdaq). Through these organizations, many securities not listed on a major stock exchange may be traded by dealers using computer and telecommunications technology; in 1994, NASDAQ, on which many computer and other high-technology stocks are traded, surpassed the NYSE in annual share volume. After the deregulation of the British securities market in 1986, the London Stock Exchange saw a decline in business due to a new computerized market similar to NASDAQ. The 21st cent. has seen the mergers of many stock exchanges, such as those that created Euronext in 2000 from the Amsterdam, Brussels, and Paris exchanges, expanded it in subsequent years, and brought it and the NYSE into NYSE Euronext, Inc., in 2007. Intercontinentcal Exchange (ICE), an exchange and clearinghouse network focused on commodities futures and options, purchased NYSE Euronext in 2012, and sold off Euronext in 2014. The stocks of public companies are also traded outside exchanges on such alternative trading systems as electronic communication networks.

Computer-driven trading has significantly affected the stock exchange. Computer and telecommunications technology, besides opening a wide market in over the counter dealings, has also given rise to trading on an international level. Networked computers allow trading to occur around the clock (after-hours NYSE and NASDAQ trading began in 1999), and the securities trading on one major stock exchange can now significantly affect the trading on others. Technology also now allows for "day trading," a high-risk business in which numerous computerized trades are made during a single day, with large gains (and large losses) possible.

Another form of computerized trading is high-frequency trading, in which computer programs analyze the market and execute trades at high speed to reap momentary financial benefits. Such trades often involve very small gains that are magnified by the amount of shares traded and the number of trades made. Traders engaged in high-frequency trading are typically employed by well-capitalized firms and hold shares for brief periods of time, usually selling all shares by the end of a trading day. High-frequency trading firms have also used early access to information concerning orders for stock, often provided the stock exchanges, to profit on such orders, an approach that has been widely criticized. A majority of all trades are now excecuted by high-frequency traders. As a result of these and other changes, many contend that the traditional manner of trading will eventually become obsolete. The increasing volatility of the stock exchanges in the early 21st cent. and the drop in the number of private companies going public has led to the development of private stock exchanges where the shares of private companies may be traded under restricted terms.

See also margin requirementmargin requirement,
that part of a security's price that a buyer must pay for in cash. The balance of the price is met by the broker, who, in effect, is supplying a client with a loan. The smaller the margin, the greater the inducement to speculation.
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.

Bibliography

See A. Crump, The Theory of Stock Speculation (1983); D. L. Thomas, The Plungers and the Peacocks: An Update of the Classic History of the Stock Market (1989); E. S. Bradley and R. J. Teweles, The Stock Market (7th ed. 1998).

The Columbia Electronic Encyclopedia™ Copyright © 2013, Columbia University Press. Licensed from Columbia University Press. All rights reserved. www.cc.columbia.edu/cu/cup/
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