The stock exchange is one of the pillars of the economy. Thanks to the stock exchange, companies can acquire capital for development, and investors can invest capital surpluses. The stock market is associated with a modern building with a large server room, where millions of transactions are processed and trading value is worth billions of dollars. Let’s go back to the beginning of the stock exchanges for a moment.
The first known collective form of trade are the ancient fairs that were located in Rome. At that time, the first forms of brokering in trading developed, i.e. today’s brokerage houses.
One of the oldest exchange, which resembles those nowadays, was the exchange located in the Belgian city of Antwerp. The Belgian exchange was founded in 1531. On the other hand, operating stock exchanges to this day were created in the 18th century in the United States, mainly in Chicago and New York. Exchanges in Chicago were mainly engaged in trade in agricultural products, and New York exchanges trading in equities.
New York Stock Exchange
The best known and currently the largest stock exchange in terms of capitalization is the New York Stock Exchange, abbreviated as NYSE. Stock Exchange was founded in 1792. The history of the stock market began under the plane-tree on Wall Street, where 24 brokers signed a founding agreement, which was later named Buttonwood Agreement. The first securities that were used to trade were war bonds used to finance military operations. Initially, the trade took place in a cafe located on Wall Street, which was called Tontine Coffee House.
Crashes on NYSE
The New York Stock Exchange experienced a lot of crashes when stocks were sold off in panic by a terrified crowd. One of the most famous crashes was the so-called black Thursday, 24 October 1929. There was a huge speculative bubble on the stock exchange, because the banks were happy to provide loans for the purchase of shares, and the companies conducting uncertain businesses, or even created only to enter the stock exchange and acquire capital, were practically not controlled. The stock market crash began on Thursday with a roughly 11% drop in the Dow Jones Industrial Average, then the DJIA index fell around 13% on Monday and 12% on Tuesday. The outbreak of the crash caused many people to lose all their money, but most of all, it started the Great Depression, probably the biggest economic crisis in the 20th century. Unemployment in the United States reached 30%. The blame for the crash was the introduction of the so-called short sale to the stock exchange, i.e. the possibility of selling shares without their previous purchase and earning on declines. Although it must be admitted that the problem of entering uncertain companies on the stock exchange was also noticed and the reporting of financial results by listed companies was implemented. Currently, listed companies must report their results on a quarterly basis. Companies also present forecasts for future quarters, but the norm is that the results are overstated.
In the twentieth century, we had a few more crashes, and the next one was the black Monday October 19, 1987. In the 20th century, we had a few more crashes, and the next one was the black Monday 19 October 1987. The DJIA index dropped 22% this day and it was the largest percentage drop in this index in history, around 500 points. This time the blame for the crash was laid on the automated trading programs introduced during this period. John Murphy had a different opinion, who in his book ” Intermarket Analysis” quite aptly pointed to the reasons for the collapse of stock prices. The reason was the increase in commodities prices, as a result of which inflation increased, which caused a drop-in bond prices, and consequently also collapsed share prices. The author notes that commodity markets usually move in the opposite direction to capital markets, i.e. bonds and equities. The bond market collapsed half a year before the stock market crash, so there was a lot of time to react. Unfortunately, many people did not see the threat believing blindly in the media assurance that the stock market is doing great. This period is called distribution, meaning selling overbought shares by big players to crowd who still believe in bull market.
It is also worth mentioning the last crash caused by subprime loans, which turned into a global financial crisis. On September 15, 2008, bankruptcy was announced by the fourth largest investment bank Lehman Brothers.
Mergers and acquisitions
In 2006, the New York Stock Exchange merged with the Archipelago Exchange and the Euronext European exchange. In 2007, the NYSE took over the American Stock Exchange, Amex. In 2012, a real giant was created when the NYSE Euronext took over the Interchange Exchange (The ICE).
The National Association of Securities Dealers Automated Quotations (NASDAQ) is the second largest stock exchange in the world in terms of capitalization. It was founded in 1971 and is associated mainly with technology companies. Until 2006, the stock exchange functioned as a regulated over-the-counter market created by market makers creating an alternative trading system. The main indexes are NASDAQ Composite and NASDAQ 100. The indexes in 2016 exceeded the levels from 2000, that is from the period of the so-called online bubble, when there was real madness on technology companies.
ECN, revolution on Wall Street
Stock markets in the United States underwent a real revolution in 1996. SEC (US Securities and Exchange Commission) after the tests allowed the introduction of alternative stock exchanges. The transactions began to be implemented using ECN (Electronic Communication Network). ECN allows you to omit the broker, which significantly reduced the costs of transactions. Over the years, more and more exchanges began to appear. Increasing competition has led to an even greater reduction in commissions for transactions, and additional liquidity gains have been started, meaning limit orders, and for commissioned liquidity orders, commission is required. Increasing competition led to an even greater reduction in commissions for transactions, also rewards for liquidity, i.e. limit orders.
Most popular exchanges offering ECN:
- Direct Edge (currently connected with BATS Global Markets),
- and many others.
London Stock Exchange
The London Stock Exchange was established in the 19th century and is the third largest stock exchange in the world in terms of capitalization, after NYSE and the NASDAQ. The London Stock Exchange is the oldest operating stock exchange in Europe. The main index is FTSE 100, which associates companies such as BP (British Petroleum), HSBC banking company, one of the largest mobile network operators Vodafone, airlines British Airways, or one of the more well-known news agencies Reuters.
Tokyo Stock Exchange
Let us now move to the Far East, and more precisely to Japan, where in the second half of the nineteenth century the Tokyo Stock Exchange was established. Let us now move to the Far East, and more precisely to Japan, where in the second half of the 19th century the Tokyo Stock Exchange was established. The Tokyo Stock Exchange is the largest stock exchange in Japan and East Asia. The Tokyo Stock Exchange is the largest stock exchange in Japan and East Asia. The main stock index is Nikkei 225. The Nikkei 225 index associates companies such as Canon, Casio, Sony, Mazda, Mitsubishi and many other famous brands.
The Frankfurt Stock Exchange, Börse Frankfurt, was founded in the 1990s. It is the smallest in terms of capitalization of the exchange from the mentioned. The main index is DAX 30, which associates companies such as Adidas, Allianz, Deutsche Bank, Lufthansa, Volkswagen and many other well-known global brands.
Warsaw Stock Exchange
The Warsaw Stock Exchange was established in 1991. It is the largest stock exchange in the Central Europe. In the past, there have been several attempts to merge the WSE with other exchanges, for example with stock exchange in Vienna, but the transaction did not materialize. Time will tell if the Warsaw Stock Exchange will join with others, as it was in the case of many global exchanges.
The stock exchange is a very important element of the economy. It allows you to acquire capital for the development of companies through the issue of bonds or shares. This model of raising capital is very popular especially in the United States. The capital is obtained from investors who can place their surpluses, in their opinion prospective companies, and thus multiply capital, but also contribute to the development of the companies and the economy. This way of acquiring capital seems to be more rational than loans that increase the money supply and, consequently, inflation.
Invest in the stock market, or maybe more speculate, we can also use CFDs, which have opened many markets for retail investors. Additionally, thanks to leverage, we can start trading with small capital. It is very important to speculate that CFDs are the choice of a broker who will act as an intermediary in CFD transactions. There are two types of brokers, Market Maker and STP/ECN. The first one is always the other party to the transaction, and the other one should theoretically transfer the transactions to liquidity providers, but it is different. Therefore, a very important element is a stable trading partner, in this case a broker.