new york stock exchange Archives | Imarticus

The History Of Stock Exchange

Stock-Market

The New York Stock Exchange today is almost synonymous with stocks and shares. This is where everyone (in the corporate sense), who is anyone; lists their stocks and trades them. You must have heard people talk about ‘stocks’ in both specific and general sense, while they do mean stocks but, they are also referring to all those companies listed on the stock exchange is New York, which is also known as the big daddy of the big leagues in the field of finance. This might be the scenario today, but it would be surprising to know that the first stock exchange did not involve any stocks whatsoever. There have been a number of evolution’s throughout the history leading to where the stocks stand today.

By definition, “A stock, is the capital raised by a company or corporation, through the issuing and underwriting of securities and equities.”According to Investopedia, “A stock is a type of security that signifies ownership in a corporation and represents claim on part of the corporation’s assets and earnings”. Today stocks are mainly of two types, common stock and preferred stock. While the preferred kind of stock gives the owner a higher claim on the assets and earnings; the common stock usually makes the owner entitled to vote at shareholder meetings and to receive dividends.

Stock-Market While historically speaking, it was in Belgium that the first stock market was opened, although at this time there were no real stocks to deal with. This was contemporary to the Venetians and various other Europeans who would carry slates with them, in the bid to buy and sell securities from the government. Although the most relatable, historical example would be that of the scores of East India Companies, that came to be during the period of Economic Imperialism. It was the governments of various countries and their countrymen namely, the French, Dutch and British, who had stakes in the profits of these companies, functioning in Asian and African continents. During this period, the only kind of trade possible was by sea and there were a lot of chances of valuable goods and wealth being lost to the ocean. Thus, to protect themselves from these calamities, the merchants and traders used to look for various investors, who would put their money both on the ship and the crew, thus gaining certain amounts of returns in the end.

During this time, it was the coffee shops all over Europe, that became the most important hubspots for merchants, brokers and investors to gather and buy and sell shares. The East India Company’s era was the time when a lot of evolution took place, in the stock market sphere; mainly because of the presence of a government backed monopoly. It was the Philadelphia Stock Exchange that came into being before the New York Stock Exchange, although the later proved to be more powerful. And the rest of it is history since then. Today with the emergence of NASDAQ, the field of stock exchange received a new lease on life, through this network of computers, which executed trades electronically. As it stands today, the field of Investment Banking is still considered to be one of the most challenging and rewarding fields. Professionals here are looked up to for their exemplary negotiation skills and finesse in closing multimillion dollar deals.

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  • November, 17th, 2016
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Additional Speed limits by BSE will only reduce liquidity.

BSE will only reduce liquidity.

Stock exchanges across the world impose circuit filters to check excessive volatility in the markets. There is a percentage limit set for each stock and indices beyond which the stock or index can’t be traded. This is the maximum fluctuation that is allowed in the price during trading. As taught by investment banking courses in India, if the stock or the index hits the maximum permissible limit in either direction, the exchanges suspend the trading for the remainder of the day.

As an example, the New York Stock Exchange (NYSE) sets three trading curb levels at 7% (L1), 13% (L2), & 20% (L3) of the average closing price of the S&P 500. The exchange takes action depending on the point drop that happens. The L1 and L2 drops result in a suspension of trading for 15 minutes and an L3 results in stoppage of trading for the rest of the day.

 

blogThe Bombay Stock Exchange (BSE) has imposed additional circuit filters or price limits to over 3700+ stocks. These are weekly, monthly, quarterly and even yearly limits over and above the already existing daily limits. There are daily price bands wherein the exchange does not allow stocks to move beyond 2,5,10 and 20 percent on any given trading day. As per the new rule, which even the school of investment banking teaches, there will be weekly, monthly, quarterly and even yearly circuit limits. The percentage limits will depend on the existing daily limits for the stocks.
This move is intended towards reducing stock manipulation. While the intent is very good, it may prove counterproductive as it will adversely impact liquidity and trading volumes. A large number of stocks are already illiquid and it may only lead to dwindling trading volumes for these stocks. This move seems to be in contradiction to the very purpose for which an exchange exists – to provide a liquid market for listed stocks. Financial markets perform two major economic functions, Liquidity and Price Discovery. Large trading volumes not just help the price discovery but also reduce transaction cost.

 
What is required is a more robust surveillance mechanism, closely monitoring not just the prices movements but also monitoring the trading positions of trading members, frequenting the stocks in question. The move to impose additional limits will only bring about a change in the trading strategies of the interested trading members who are responsible for the manipulation. The ones to lose will be the investor at large who will have more liquidity issues than before. Having said that as an alternative, the exchange may want to initially experiment with only those stocks with a threshold market capitalisation and review the same on a periodic basis. Given the biggest downside being reduction in trading volumes, the rule may initially be imposed only on stocks with a decent trading volumes (read market capitalisation).

 
Whether the move will achieve its objective or not, only time will tell but the impact on some of the illiquid stocks illiquid-stocksmay be far more than the ones with better trading volumes. The exchange will surely be monitoring the stocks particularly illiquid ones closely and will take timely corrective action before it’s too late.

  • December, 17th, 2015
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