Foreign exchange market

he foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies. The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollar

stack exchanges of world

Stock market downturn of 2002

The stock market downturn of 2002 (some say "stock market crash" or "the Internet bubble bursting") is the sharp drop in stock prices during 2002 in stock exchanges across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11, 2001 attacks, indices slid steadily starting in March 2002, with dramatic declines in July and September leading to lows last reached in 1997 and 1998. The dollar declined steadily against the euro, reaching a 1-to-1 valuation not seen since the euro's introduction.

Chinese correction

The Chinese Correction was the global stock market plunge of February 27, 2007 which wiped out hundreds of billions of market value. After rumors that governmental Chinese economic authorities were going to raise interest rates in an attempt to curb inflation and that they planned to clamp down on speculative trading with borrowed money, the SSE Composite Index of the Shanghai Stock Exchange tumbled 9%, the largest drop in 10 years.

The plunge in Asian markets sent ripples through the global market as the world reacted to the 9% meltdown in the Chinese stock market. The Chinese Correction triggered drops and major unease in nearly all financial markets around the world.

After the Chinese market drop, the Dow Jones Industrial Average in the United States dropped 416 points, or 3.29% from 12,632 to 12,216 amid fears for growth prospects, then the biggest one-day slide since the September 11, 2001 terrorist attacks. The S&P 500 saw a comparable 3.45% slide. Sell orders were made so fast that a second analysis computer had to be used, causing an instantaneous 200 point drop at one point in the Dow Industrials.

Every Generation Has Its Crash

From financing the War of 1812 to today's internet and biotechnology companies, Wall Street has played a very significant role in both the American economy and its welfare. In the 19th and early 20th century, the American economy would go through repetitive periods of boom and bust, and on numerous occasions, specific names on Wall Street would be actively involved. Figures such as Cornelius Vanderbilt, Daniel Drew, Jay Gould, J.P. and Jack Morgan in their heydays controlled vast economic fortunes, and with the touch of a hand, could bring Wall Street to its knees.

The gold corner of 1869 was such an example. With the aid of Jim Fisk and Daniel Drew, Jay Gould decided to corner the gold market of the United States. There was only one problem. The U.S. Treasury had approximately $100 million worth of gold secured at Fort Knox, and any attempt to corner the gold market would require the Treasury to stay away. Gould's vast political connections (one of whom was the President, Ulysses Grant) ensured that. By the time they had accumulated all the gold they had intended to (Gould alone bought $7 million), the premium on gold was 160%. This forced the short-sellers to cover, which stabilized the price of gold at about that price. Gould sold all his holdings at the top of the market and made a profit of $10 million. The Treasury did not intervene until several days later, and the fallout was great. Several firms on Wall Street failed, and the stock market collapsed as a result -- which in turn caused numerous brokerage firms to fail.

The panic of 1907 brought out a single savior -- not the Treasury, nor the Federal Reserve (which did not exist then), but J.P. Morgan. The stock market had a very high valuation going into 1907. From March to October, the stock market fell continuously, and in late October, the impending failure of the Knickerbocker Trust Company caused a run on its already depleted funds. The company was left to fail, but Morgan, along with other well-known bankers, provided the funds necessary (>$25 million) to prop up the other major trust institutions. At the same time, the Treasury was propping up the stock market with its own funds. When they ran out, they had to ask Morgan for help. Morgan provided a further $25 million. Without his aid, the NYSE would have to shut down.

Mathematical theory and stock market crashes

The mathematical characterisation of stock market movements has been a subject of intense interest. The conventional assumption has been that stock markets behave according to a random Gaussian or "normal" distribution.[23][24] Among others, mathematician Benoît Mandelbrot suggested as early as 1963 that the statistics prove this assumption incorrect.Mandelbrot observed that large movements in prices (i.e. crashes) are much more common than would be predicted in a normal distribution. Mandelbrot and others suggest that the nature of market moves is generally much better explained using non-linear analysis and concepts of chaos theory. This has been expressed in non-mathematical terms by George Soros in his discussions of what he calls reflexivity of markets and their non-linear movement.

Research at the Massachusetts Institute of Technology suggests that there is evidence the frequency of stock market crashes follows an inverse cubic power law.This and other studies such as Prof. Didier Sornette's work suggest that stock market crashes are a sign of self-organized criticality in financial markets. In 1963, Mandelbrot proposed that instead of following a strict random walk, stock price variations executed a Lévy flight. A Lévy flight is a random walk that is occasionally disrupted by large movements. In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five year period.Their conclusion was that stock market returns are more volatile than a Gaussian distribution but less volatile than a Lévy flight.

Researchers continue to study this theory, particularly using computer simulation of crowd behaviour, and the applicability of models to reproduce crash-like phenomena.

France

In France, daily price limits are implemented in cash and derivative markets. Securities traded on the markets are divided into three categories according to the number and volume of daily transactions and price limits vary depending on the category to which the security belongs. For instance, for the more liquid category, when the price movement of a security exceeds 10% from the quoted price at the close of the previous market day, quotation is suspended for 15 minutes. After 15 minutes, transactions are resumed. If the price then goes up or down by more than 5%, transactions are again suspended for 15 minutes. The 5% threshold may apply once more before transactions are halted for the rest of the day. When transactions are suspended in the cash market on a given security, due to undue price movement, transactions on the option based on the underlying security are also suspended. Further, when more than 35% of the capitalization of the CAC­40 Index is unable to be quoted, the calculation of the CAC­40 Index is suspended and the index is replaced by a trend indicator. When less than 25% of the capitalization of the CAC­40 Index is able to be quoted, quotations on the derivative markets are suspended for half an hour or one hour when additional margin deposits are requested

United States

There are three thresholds each of which represents different level of decline in terms of points in Dow Jones industrial average.

In the event where threshold 1 is breached, the first halt is triggered. If that point is reached before 2 p.m., the market would shut down for an hour. If threshold 1 is breached between 2 p.m. and 2:30 p.m., the halt will last 30 minutes. No trading stops will take place if threshold 1 is breached after 2:30 p.m.

If threshold 2 is breached before 1 p.m., the market would close for two hours. If such a decline took place between 1 p.m. and 2 p.m., there would be a one-hour pause. The market would close for the day if stocks sank to that level after 2 p.m.

In the event where threshold 3 is breached, the market would close for the day, regardless of the time.

The thresholds are computed at the beginning of each quarter to establish a specific point value for the quarter.

For the first quarter of 2009, threshold 1 is 850 points, threshold 2 is 1700 points, and threshold 3 is 2600 points.

The rules would halt trading on the major securities and futures exchanges in a coordinated cross-market halt if the circuit breaker is enacted.

The Crash of 2008

On September 16, failures of large financial institutions in the United States, due primarily to exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans and their issuers, rapidly devolved into a global crisis resulting in a number of bank failures in Europe and sharp reductions in the value of equities (stock) and commodities worldwide. The failure of banks in Iceland resulted in a devaluation of the Icelandic Krona and threatened the country with bankruptcy. Iceland was able to secure an emergency loan from the IMF in November.^[6] In the United States, 15 banks failed in 2008, while several others were rescued through government intervention or acquisitions by other banks.^[7] On October 11, 2008, the head of the International Monetary Fund (IMF) warned that the world financial system was teetering on the "brink of systemic meltdown".^[8]

The economic crisis caused countries to temporarily close their markets.

On October 8, the Indonesian stock market halted trading, after a 10% drop in one day.

The Times of London reported that the meltdown was being called the Crash of 2008 and older traders were comparing it with Black Monday in 1987. The fall this week of 21 percent was not as bad as the 28.3 percent fall 21 years ago. But some traders were saying it was worse. “At least then it was a short, sharp, shock on one day. This has been relentless all week.”^[9]. Business Week also referred to the crisis as a "stock market crash" or the "Panic of 2008."[

October 19, 1987

The mid-1980s were a time of strong economic optimism. From August 1982 to its peak in August 1987, the Dow Jones Industrial Average (DJIA) grew from 776 to 2722. The rise in market indices for the 19 largest markets in the world averaged 296 percent during this period. The average number of shares traded on the NYSE had risen from 65 million shares to 181 million shares.[1]

The crash on October 19, 1987, a date that is also known as Black Monday, was the climactic culmination of a market decline that had begun five days before on October 14. The DJIA fell 3.81 percent on October 14, followed by another 4.60 percent drop on Friday, October 16. On Black Monday, the Dow Jones Industrials Average plummeted 508 points, losing 22.6% of its value in one day. The S&P 500 dropped 20.4%, falling from 282.7 to 225.06. The NASDAQ Composite lost only 11.3%, not because of restraint on the part of sellers, but because the NASDAQ market system failed. Deluged with sell orders, many stocks on the NYSE faced trading halts and delays. Of the 2,257 NYSE-listed stocks, there were 195 trading delays and halts during the day.[2] The NASDAQ market fared much worse. Because of its reliance on a "market making" system that allowed market makers to withdraw from trading, liquidity in NASDAQ stocks dried up. Trading in many stocks encountered a pathological condition where the bid price for a stock exceeded the ask price. These "locked" conditions severely curtailed trading. On October 19, trading in Microsoft shares on the NASDAQ lasted a total of 54 minutes.

Wall Street Crash of 1929

The economy had been growing robustly for most of the so-called Roaring Twenties. It was a technological golden age as innovations such as radio, automobiles, aviation, telephone and the power grid were deployed and adopted. Companies who had pioneered these advances, like Radio Corporation of America (RCA) and General Motors, saw their stocks soar. Financial corporations also did well as Wall Street bankers floated mutual fund companies (then known as investment trusts) like the Goldman Sachs Trading Corporation. Investors were infatuated with the returns available in the stock market especially with the use of leverage through margin debt. On August 24, 1921, the Dow Jones Industrial Average stood at a value of 63.9. By September 3, 1929, it had risen more than sixfold, touching 381.2. It would not regain this level for another twenty five years. By the summer of 1929, it was clear that the economy was contracting and the stock market went through a series of unsettling price declines. These declines fed investor anxiety and events soon came to a head on October 24 (known as Black Thursday) and October 29 (known as Black Tuesday).

On Black Tuesday, the Dow Jones Industrial Average fell 38 points to 260, a drop of 12.8%. The deluge of selling overwhelmed the ticker tape system that normally gave investors the current prices of their shares. Telephone lines and telegraphs were clogged and were unable to cope. This information vacuum only led to more fear and panic. The technology of the New Era, much celebrated by investors previously, now served to deepen their suffering.

Crowd gathering on Wall Street after the 1929 crash.

Stock market crash

A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.

Stock market crashes are in fact social phenomena where external economic events combine with crowd behavior and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions[citation needed]: a prolonged period of rising stock prices and excessive economic optimism, a market where Price to Earnings ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.

There is no numerically specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable

Determining Value

Let's say that you want to start a business, and you decide to open a restaurant. You go out and buy a building, buy all the kitchen equipment, tables and chairs that you need, buy your supplies and hire your cooks, servers, etc. You advertise and open your doors.

Let's say that:

• You spend $500,000 buying the building and the equipment.
• In the first year, you spend $250,000 on supplies, food and the payroll for your employees.
• At the end of your first year, you add up all of the money you have received from customers and find that your total income is $300,000.

Since you have made $300,000 and paid out the $250,000 for expenses, your net profit is:

$300,000 (income) - $250,000 (expense) = $50,000 (profit)

At the end of the second year, you bring in $325,000 and your expenses remain­ the same, for a net profit of $75,000. At this point, you decide that you want to sell the business. What is it worth?

How Stocks and the Stock Market Work

The stock market appears in the news every day. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in statements like "The Dow Jones Industrial Average rose 2 percent today, with advances leading declines by a margin of..."

Obviously, stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do we need a stock market? Where does the stock come from to begin with, and why do people want to buy and sell it? If you have questions like these, then this article will open your eyes to a whole new world!

Stock Investment and Stock Trading Objectives

It is important to determine your stock investment and stock trading objectives as it varies for each individual. The objectives of a married 28 year old with a newborn baby are totally different than the objectives of a 50 year old looking to retire and, of course, both are totally different than the objectives of a 23 year old who is single. It is important to define the financial responsibilities one has in order to better manage his/her money. Before you start investing in the stock market, write down your objectives and goals as an investor along with your present and future financial responsibilities.

Over The Counter Stock Market Trading – NASDAQ

The NASDAQ is different from the New York Stock Exchange because the NASDAQ exchange has no physical location nor trading posts. This exchange is 100% electronic and the specialist here is replaced with Market Makers (MM.) These Market Makers are individual firms willing to make a market. The Market Maker is similar to a specialist on the NYSE, but he acts as a dealer, not as a broker. In general, the Market Maker has a position in a particular stock and sells out of his own inventory. Market Makers make their money from a markup or markdown rather than from commissions. The Market Maker regularly publishes Bid and offer quotes and is ready to buy or sell the stock at the quoted prices. These quotes can be seen on a Level II screen.

The Exchange Stock Market

The Exchange Market is a place where buyers and sellers come together to trade. The best known and largest exchange is the New York Stock Exchange (NYSE). The NYSE is a large room with many trading posts where trades take place. Each post has a specialist who handles specific securities. He can act as a broker's broker and make commissions on the trades, or he can buy and sell out of his own account, hence, creating a market in that specific security. The NYSE is not directly involved in the actual transactions (trades) but acts as a police officer enforcing certain rules to ensure fairness.

The New York Stock Exchange sets the policies of rules and regulations and decides which stocks are eligible for listing, and which firms can become members of the exchange. The NYSE approves specialists as well. There are many restrictions on the specialists in order to make a fair marketplace.

US small business balance sheet

A small business balance sheet lists current assets such as cash, accounts receivable, and inventory, fixed assets such as land, buildings, and equipment, intangible assets such as patents, and liabilities such as accounts payable, accrued expenses, and long-term debt. Contingent liabilities such as warranties are noted in the footnotes to the balance sheet. The small business's equity is the difference between total assets and total liabilities

Personal balance sheet

A personal balance sheet lists current assets such as cash in checking accounts and savings accounts, long-term assets such as common stock and real estate, current liabilities such as loan debt and mortgage debt due, or overdue, long-term liabilities such as mortgage and other loan debt. Securities and real estate values are listed at market value rather than at historical cost or cost basis. Personal net worth is the difference between an individual's total assets and total liabilities

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A balance sheet is often described as a snapshot of a company's financial condition.[1] Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time.

Stock market crosses 8,000 psychological barrier

KARACHI - KSE started business week with the celebration of rise in IMF financial support pledge and gained 210 points or 2.67 per cent to break the 8,000 psychological barrier. The KSE 100-index closed at 8,082 points.
Weekend news changed the dynamics of the Karachi stock market. Confirmation from IMF regarding the payment of second instalment, as well as new credit line approved by IMF changed the market sentiments.
Furthermore, confirmation of Baitullah Mehsud’s death has given some respite to US forces regarding the much controversial drown attacks. Somehow the security situation in the country has improved as per statement by governments’ representatives. Apart from that a much controversial figure Rehman dacoit was killed during clash with security forces in Karachi.
“These events may possibly improve law and order situation along with approval of IMF instalment can be termed as positive developments. Inflation number for the month of July can be termed as positive as core inflation along with CPI continued to fall, most probably as a result of base year effect”, expressed market expert Shahid Ali.
Ahsan Mehanti at Shehzad Chamdia Securities said that stability in rupee value, record result announcement of MCB Bank, MCB Bank acquisition of RBS and foreign interest in oil exploration scrips played a catalyst role in positive activity at the KSE.
Earlier, KSE 100-index opened in green zone, gaining 40.64 points and market crossed the 8,000 psychological mark in no time. Index closed the day at 8,082.06 points with a gain of 209.83 points on Monday.
Trading activity was very much improved as compared to the last trading session. The ready market volume stood at 185.769 million shares as compared to last trading session’s 141.140 million shares. Total trading value of the market inched up to Rs 10.814b from Rs 6.66b of last trading session.
Market capitalisation increased to Rs 2.381tr as compared to Rs 2.324tr of last session, showing a gain of Rs 57b. Out of 408 actively traded symbols at the KSE, as many as 232 gained value, at least 154 lost while the worth of the shares of 22 stocks remained unchanged.

Taxation

According to much national or state legislation, a large array of fiscal obligations are taxed for capital gains. Taxes are charged by the state over the transactions, dividends and capital gains on the stock market, in particular in the stock exchanges. However, these fiscal obligations may vary from jurisdiction to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes companies pay to the state, or that tax free stock market operations are useful to boost economic growth.

nvestment strategies

One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control and diversification.

Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%/year, compounded annually, since World War II).

New issuance

Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion.

Margin buying

In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim).

Short selling

In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur

Leveraged strategies

Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.

Derivative instruments

Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges (which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or traded over-the-counter. As all of these products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market

Stock market index

The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.

Crashes

stock market crash is often defined as a sharp dip in share prices of equities listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is also due to panic and investing public's loss of comfidence. Often, stock market crashes end speculative economic bubbles.

There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing number of people are involved in the stock market, especially since the social security and retirement plans are being increasingly privatized and linked to stocks and bonds and other elements of the market. There have been a number of famous stock market crashes like the Wall Street Crash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000, and the Stock Market Crash of 2008.

Irrational behavior

Sometimes the market seems to react irrationally to economic or financial news, even if that news is likely to have no real effect on the technical value of securities itself. But this may be more apparent than real, since often such news has been anticipated, and a counterreaction may occur if the news is better (or worse) than expected. Therefore, the stock market may be swayed in either direction by press releases, rumors, euphoria and mass panic; but generally only briefly, as more experienced investors (especially the hedge funds) quickly rally to take advantage of even the slightest, momentary hysteria.

The behavior of the stock market

From experience we know that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets.) Over-reactions may occur—so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have since been put forward against the notion that financial markets are 'generally' efficient (i.e., in the sense that stock prices in the aggregate tend to follow a Gaussian distribution).

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

Function and purpose

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. An economy where the stock market is on the rise is considered to be an up and coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. 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

Importance of stock market

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. 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.

Market participants

A few decades 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, index funds, exchange-traded funds, hedge funds, investor groups, banks and various other financial institutions). 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.[citation needed])

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners'.

Stock market

A stock market is a public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. [1] The total world derivatives market has been estimated at about $791 trillion face or nominal value, [2] 11 times the size of the entire world economy. [3] The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring.). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

American Stock Exchange

NYSE Amex Equities, formerly known as the American Stock Exchange (AMEX) is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953 it was known as the New York Curb Exchange.[4] On January 17, 2008 NYSE Euronext announced it would acquire the American Stock Exchange for $260 million in stock.[5] On October 1, 2008, NYSE Euronext completed acquisition of the American Stock Exchange.[6] Before the closing of the acquisition, NYSE Euronext announced that the Exchange will be integrated with Alternext European small-cap exchange and renamed NYSE Alternext U.S.[7] In March 2009, NYSE Alternext U.S. was again rebranded to NYSE Amex Equities.[

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors.

Corporate governance

By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately-held companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the early 2000s, and the subprime mortgage crisis in 2007-08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Lehman Brothers (2008), and Satyam Computer Services (2009) were among the most widely scrutinized by the media.

Profit sharing

Both casual and professional stock investors, through dividends and stock price increases that may result in capital gains, will share in the wealth of profitable businesses.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion.

Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firmsa

Raising capital for businesses

The Stock Exchange provide companies with the facility to raise capital for expansion through selling shares to the investing public.

The role of stock exchanges

Stock exchanges have multiple roles in the economy, this may include the following

The First Stock Exchanges

In 11th century France the courtiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers.

Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met.