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A Guide to Stock Markets
The Birth of Stock Exchanges
The Amsterdam Stock Exchange became the world’s first stock exchange in 1602. It was created so the Dutch East India Company could issue printed stocks, which are essentially a collection of shares, as well as bonds. The success of the exchange prompted fellow maritime powers, including France, Spain and Portugal, to also engage in the buying and selling of shares. Eventually, the idea made it to England.
The need to establish a formal exchange in England grew as the number of shares skyrocketed. Because of this, a coffeehouse in London was selected by stock traders to be used for this purpose. Brokers would create write-ups of all the shares and bonds issued and then post them on the doors of the establishment for investors to buy. The coffeehouse was soon overrun by the stock traders, and that’s when its name was changed to the London Stock Exchange in 1773. After the idea reached the United States, the country had its first stock exchange, The Philadelphia Stock Exchange, created in 1790.
It wasn’t until 1792 that the first securities were traded in the United States. It was spurred by the Buttonwood Agreement, which was heavily influenced by European trading systems. It was called the Buttonwood Agreement because, according to legend, it was signed by 24 merchants and stockbrokers under a Buttonwood tree on Wall Street in New York City. This is how Wall Street’s investment community began. only securities being issued at the time were government bonds and stocks from a few banks.
The Buttonwood Agreement was necessary because, by 1792, there was panic in the United States due to several financial obligations not being met. Furthermore, there was uncertainty surrounding the future solvency (state of having more assets than liabilities) of companies. The agreement established a system of trust between merchants and stockbrokers, where trade would only happen if both parties had the public’s interest at heart.
In New York, as in London, stock traders began meeting at a coffee house. However, all their trading activities were designated to a specific section of the coffee house that they had rented out to run their organization. By 1817, the organization had grown considerably and changed its name to the New York Stock and Exchange Board. The name was later changed to the New York Stock Exchange (NYSE). Soon after that, the organization dominated the stock markets in the United States. The success of the NYSE went on to define the economic future of the entire world.
Today, stock exchanges in every country collectively guide the world’s economic future. Each stock exchange contributes a significant amount of capital towards industry growth and development. This capital is then used to bring many revolutionary and original ideas to life or drive innovation. Stock markets also allow for private investment, giving the general public enough financial security and individual wealth to support their personal ventures, including retirement.
Modern Stock Markets and Trade Exchanges
Stock markets fuel the economy, as they allow public companies to raise money for their businesses so they can expand and grow. Therefore, a stock market gives a forum to investors – one where they can buy and sell investments, or shares of ownership, in a public company. This site is designed so you can keep up-to-date on stock investments, locally or nationally, and learn more about how the market works.
Getting Started in Investing
If you wish to buy mutual funds or stocks, you must go to a trading platform that accesses the stock market. You can do this by enrolling in a brokerage account or employee retirement plan, or by signing up and using a robo-advisor (a computer software program that will manage your portfolio).
The idea of investing in stocks produces a “win-win” situation for the investor and a company. By issuing shares of stock, a company can gain the equity required to realize growth while the investor wins if his or her per share price increases. This enables the company to add to its equity while investors can direct their goals toward building wealth.
Although the term, stock market is used interchangeably with stock exchange, the term, stock exchange is not the same thing. Stock exchanges are a part of a stock market. For example, the major stock exchanges that operate in the U.S. stock market include the New York Stock Exchange (NYSE), Nasdaq, and the Chicago Board Options Exchange (CBOE). Outside the U.S., other major exchanges include the Tokyo Stock Exchange and the London Stock Exchange.
Meeting the Listing Requirements for Trading
To qualify for listing on the msot stock exchanges, companies must meet certain listing requirements. For example, the NYSE lists the requirements for trading that must be met. These requirements cover the aggregate shareholders’ equity for the last 3 years, global market capitalization, and a minimum price per share. Both the equity and capitalization must be in the millions of dollars. For initial public offerings the company must have at least 400 shareholders to begin trading.
While a stock market, also called an equity market, is used primarily for trading stocks or equities, other financial securities may be traded as well. These include corporate bonds or exchange traded funds (ETFs). Stock markets also serve as a venue for trading derivatives based on specific securities, such as bonds, currencies, commodities, and stocks.
Tracking Stock Market Performance
The term, “stock market,” frequently references one of the main stock market indexes in the U.S. – either the S&P 500 or the Dow Jones Industrial Average (DJIA). Because tracking each stock proves difficult, these indexes review the performance of the market as a whole.
The Dow Jones Industrials
The Dow Jones Industrial Average (DJIA) is the most well-known of the stock market indexes. The index, owned by Dow Jones & Company, gauges the price movement each day of 30 major U.S. companies on the NYSE and NASDAQ. The DJIA may be used to determine economic growth in the U.S. or stock market conditions overall.
The DJIA, often referred to as the “Dow,” represents the “pulse” of stock market activity. If you hear about the stock market closing up or down for the day, you can use this information to determine your plans for investing or trading.
The stock market, itself, works like an auction house, except it operates through a network of stock exchanges. When a company lists shares of stocks on an exchanges, it does so through an initial public offering or IPO. Every time an investor buys shares of stocks, he or she helps a business raise equity to improve its services and make money. A stock exchange, in essence, allows investors and others to track the supply or demand of specific stocks. In turn, the supply and demand of a stock determines the stock price and measures investor and trader participation.
How Stocks Trade
During a stock trade, a stock buyer offers a bid, or what they are willing to pay for a stock. This price typically is lower than the amount a seller asks for in exchange. The amount of the difference between the bid and ask price is known as a bid-ask spread.
For a trade to occur, either the stock purchaser must increase his or her price or the seller needs to reduce the asking price. While this may sound rather complicated, innovations in trading today allow computer algorithms to do most of the price-setting calculations.
In the beginning, stock trading took place in a physical market. However, today, the stock market relies on electronics. In turn, independent trades can be made by following the stock market’s movement in relation to economic conditions, political happenings, and current news reports.
Stock Market Risk and Volatility
While investing in stocks does come with some risk, that risk can be reduced by diversifying a stock portfolio and investing long-term, or by reinvesting stock dividends. Day trading represents the riskiest type of stock investment, as the trader must quickly buy and sell shares, based on price swings. The key to safe investing is to invest in low-cost index funds that track the stock market, and to stay invested, through the ups and downs, so you can work at building wealth.
You can also invest in mutual funds, a 401(k) at work, or buy individual stocks through a brokerage account or IRA. Again, any stock investment carries certain risks, but it also carries the potential for substantial rewards. Diversification reduces investment risks and helps you realize those long-term rewards. Instead of buying individual stocks, you can buy an index fund (a type of mutual fund) or an exchange-traded fund (ETF), both which feature a series of stocks. These funds offer the greatest potential for financial growth if you hold them long-term.
Whatever your trading strategy, you can make money in the stock market. To realize gains in the market, you need to stay on top of the latest news and political events, follow the stock market indexes, and learn more about the companies where wish to invest. This site will help you become a better investor while helping you recognize your individual goals for equity funding and trading.
Whether you are a member, occasional visitor, or new user to StockMarkets.com, we hope that you enjoy what you read and visit us again soon as we continue to add fresh content and features. If you have any suggestions or comments we look forward to hearing from you.
Stock Market Facts
Here are some fast facts about global stock markets and exchanges.
We have assembled some fast facts about Stock Markets. This information was compiled from a variety of resources including NYSE, NASDAQ and foreign stock exchanges. Below is our profile containing facts and information to familiarize you about the financial markets and stocks.