Stock Exchange (SE) is the most important component of the Stock Market. It is the platform where stock buyers connect with stock sellers. There is some amazing history associated with the stock exchanges. Let us dive right into that.
Early History of Stock Exchange
Coffee, Tea or Tree
Did you know that most stock exchanges had their beginnings under a tree or in coffee houses?? These meeting points were the first informal places where traders and investors did business. They met, discussed and dealt with government, business and individual debt issues. However there was no trading in stocks. It was more to do with promises or handwritten promissory notes.
Going to the Bourse
Belgium boasted of a stock exchange in Antwerp as early as 1531. Antwerp was the home of the influential Van der Beurze family. It was in this house that merchants would gather and trade with one another. Hence the term ‘going to the bourse’ or ‘bourse’ originated. However, today the word ‘bourse’is more commonly associated with the Paris Stock Exchange.
First Formal Stock Exchange
Amsterdam Stock Exchange is the world’s first formal stock exchange. It came into being riding on the back of the Dutch East India Company in 1602. As we have seen earlier, in Blog Post #3, the East India Company is widely recognized as the world’s first publicly traded company.
Jonathan’s Coffee House
The London Stock Exchange (LSE) followed in 1773. Coffee meetings at Jonathan’s Coffee House was where the LSE had its humble beginnings. It later emerged as the major stock exchange of Europe.
Buttonwood tree to Wall Street
The Philadelphia Stock Exchange was the first stock exchange of the US. However, the New York Stock Exchange (NYSE) quickly became the most powerful SE. NYSE was born under a humble buttonwood tree. 24 New York stockbrokers signed the Buttonwood Agreement and NYSE made its home on Wall Street in 1792. It then went on to become the most important exchange of the world.
Banyan Tree to Dalal Street
Bombay Stock Exchange (BSE) is the oldest stock exchange of Asia. Its history goes back to 1855. 22 stock brokers would gather under banyan trees in front of Mumbai’s Town Hall. The group eventually moved to Dalal Street. In 1957 BSE became India’s and Asia’s first stock exchange. BSE started as a floor trading exchange where brokers would shout out their trades. Of course now it follows an electronic trading system.
About Stock Exchange
Organized Secondary Market
Stock Exchange is the place or market where different types of securities are bought and sold. It is a secondary market for securities. The trading happens for securities which have already been issued to the public by listed companies. All issued securities of listed companies can be bought and sold on the stock exchange where it is listed.
Listing – admission of a Company’s securities to the trading platform of a stock exchange so as to provide marketability and liquidity to the security holders.
Delisting – permanent removal of securities of a listed company from a stock exchange (i.e) the securities of that company would no longer be tradeable on that SE. Delisting could be Voluntary at the will of the company. It could also be Compulsory arising out of a penal action by the SE for reasons of violation or lapses.
Essar Oil was incorporated as a public limited company in 1989. Its main objective was to provide Development, Exploration, Production and related services in the Oil and Gas Sector. It grew from there over the years. In December 2015, it delisted itself from the local stock exchanges. It gave a massive payout of Rs. 3745 crores to its shareholders. This makes it the largest payout to privatise a publicly listed company in India. This is a classic example of Voluntary Delisting.
Registration and Membership
A Stock Exchange is a registered body. It issues memberships to eligible persons. These members have to pay a prescribed membership fee. All persons meeting the membership criteria and requirements of the stock exchange can become members.
The members of a stock exchange are known as brokers. These brokers or their authorized agents can act on behalf of buyers and sellers of securities. Only a broker can do transactions with the stock exchange on behalf of the investors. Of course certain formalities have to be fulfilled before a broker takes you on as their client.
Role of the Stock Exchange
The most primary role of the SE is to give investors a place to liquidate their shareholdings. It helps in providing liquidity. It ensures Price Continuity of shares.
Price Continuity is an indication that there are a lot of buyers and sellers in the market for a particular stock. The price at which a buyer is willing to buy a particular stock is called the ‘Bid’ price. The price at which a seller is willing to sell that stock is called the ‘Ask’ price. The narrower the ‘bid-ask’ spread, the better the price continuity.
Stock Exchange ensures safety of transactions by providing strict rules and regulations which must be followed by the buyers and sellers. It stands as a guarantor to both parties trading on it.
So far, so good. From my next post the focus will be on the Indian Share Market. We will look into the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Ciao till we meet next my awesome friend. #Mission2020 is underway with you on board!!