What is the Stock Exchange?

What is the Stock Exchange? When a company needs money to reach its objectives, it has different alternatives to raise capital. First of all, as we have seen in the previous chapters, it can issue debt or borrow from a financial entity. Another could be through its suppliers and, finally, by issuing shares.

In this way the company obtains capital without having to be committed to return or amortize those funds to those who leave the money. By buying these shares, those who acquire them become the new owners of a part of the company’s share capital and receive the name of shareholders.

Investors expect the company to grow in profit and equity, and so do its shares.

It should be noted that the Stock Exchange is an increasingly essential element for the normal functioning of the Financial System of a market economy. It fulfills an essential function in the growth of any economy, since it gives «liquidity» to emissions made in the primary market, which is where savings are channeled towards productive investment.

The Stock Exchange is the secondary financial market par excellence, as it offers buyers of securities the possibility of converting them into money whenever they wish. It would be unattractive if they could not let go when they need money.

Finally, to indicate that it is an official and organized market that confers legal security to all the transactions that are carried out and facilitates the accessibility of all the participants.

Origins

The first financial market was born in 1460 in Antwerp after the permanent establishment of a medieval fair for the purchase and sale of securities. This was the first stock exchange institution in a modern sense. The term Stock Exchange appeared in Bruges, specifically in the bankers’ family Van der Bursen, in whose palace a securities market was organised. Subsequently, the London Stock Exchange was created in 1570, the Lyon Stock Exchange in 1595, the New York Stock Exchange in 1792, the Paris Stock Exchange in 1794, and successively stock exchanges appeared in the main cities of the world. The Stock Exchanges were consolidated after the rise of public limited companies. In Spain, the first medieval fair took place in Medina del Campo (Valladolid) in the 15th century, which, like in Antwerp, was held permanently, although it was not until 1830 that the first Stock Exchange was created in Madrid. Years later Bilbao did the same (1881) and at the beginning of the 20th century the Barcelona Stock Exchange (1915) and the Valencia Stock Exchange were created in 1981, which until then had the condition of Bolsín.

Stock Market Functions

  •  The functions of the Stock Exchange in today’s economies are many. The most important are:
  • Being the meeting point between investors and companies, it plays an essential role in the growth of any economy, since it channels savings towards productive investment. In other words, it facilitates the mobility of wealth.
  • As a secondary market, it makes it possible to convert securities into money. In other words, it offers liquidity to investors.
  • It solves, with increasing efficiency, the problem of the valuation of financial assets through supply and demand.
  • Transparency of information, which is a constant commitment of the Stock Exchange, allows all its functions to be carried out with the greatest efficiency.
  • Finally, it should be pointed out that investment in shares can protect savings against inflation. Shares represent parts of real assets, the monetary value of which increases as a result of inflation (which also increases the price of shares).

Market participants – Stock Exchange

  • The Stock Exchange is a meeting point between the two most important figures in an economy.
  • Capital demanders (public institutions such as the State, autonomous communities, municipalities, public companies and private companies) with the aim of obtaining part of the funding they need.
  • And the providers of capital (companies and individuals) who are interested in placing their surplus liquidity in order to obtain a return, even at the cost of greater risk.
  • Mediators play an important role as they contact buyers’ demands with sellers’ offers.

 

 

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