To quote its definition exactly as it is written by Bonello in the Microsoft Encarta 2008, a stock market, also known as a stock exchange or a bourse, refers to “organized market for buying and selling financial instruments known as securities, which include stocks, bonds, options, and futures.” Basically, it is where one can sell and buy stocks or other derivatives at agreed prices, which are described in Wikipedia webpage as “securities listed on a stock exchange as well as those only traded privately” (Wikipedia, June 2009).
“Most stock exchanges have specific locations where the trades are completed.” (Bonello, 2007). For a company to have its stocks traded at these exchanges, it is a must that the stocks be listed, and to be listed requires certain criteria to be met and satisfied (Bonello). However, there are also stocks that are not sold and bought at a particular site; unlisted stocks are not. Rather than at a specific exchange, unlisted stocks are usually traded by telephone or by computer; in other words, they are traded over the counter (Bonello).
The stock exchange acts more like “a gathering forum” where investors and the general public put their money into whatever companies they trust to earn them back profits. Those companies, on the other hand, can sell their stocks/shares to anyone and take the money as loans (The Mirror, 2009). The money is then used by the companies to further invest in extending their activities to earn more profits. The stock clients, who can become shareholders and co-owners of the companies who sell shares, can always gain benefits from their buying as long as the companies are profitable.
Importance of stock exchanges
So why were stock exchanges created? What are the benefits of their existence? Actually, as already mentioned in the description of a stock exchange, stock exchanges allows investors and the general public to earn profits out of lending their money to companies and companies to use the money to generate more incomes. However, stock exchanges bear importance that goes beyond just the making profits of individuals and enterprises; they also make up crucial part of the economy of a country, as well as of the world.
Importance to individuals and companies:
The stock market is described in Wikipedia as “the most important sources for companies to raise money” (Wikipedia, 2009). When investors or the general public spend their money to buy shares of ownership sold at stock the company or corporation, the money can be used as additional funds for the company/corporation’s expansion. The more money there is to use as capital, more business activities can be performed, which is likely to result in more returns to the company, as well as to the purchasers of its stocks. In reciprocation, the stock buyers can get benefits depending on how many shares they have of the corporation that is making profits. Further, as the businesses are doing better and better, the stock prices rise accordingly, making the stockholders wealthier and wealthier as they can sell the stocks in a higher price than when they first bought them. In fact, there are many people who have made millions of dollars out of this stock investment, one of whom is Warren Buffett. As quoted by Wikipedia (2009) from the preface to a published biography about Buffett, a “long-term value-oriented” stock investor, Buffett started his career with just $ 100 and ended up building himself as a multi-billionaire from the end of the 20th century to the beginning of the 21st century.
Besides, “exchanges also act as the clearinghouse for each transaction” (Wikipedia, 2009). That is, they guarantee that they sellers get payment for their sold securities, collecting and delivering the shares. In this manner, the risk of the counterparty defaulting on the transaction that might happen to an individual buyer or seller can be curbed or eliminated (2009).
Finally, one of the factors about stock exchanges that can greatly benefit individuals is the large-scale employment that is inherent with its existence. Stock markets create a lot of speculators, arbitragers, and stock brokers, just to name a few. With good understanding of the economic situations, intelligence, plus decisiveness, these professionals can make a lot of money. Other than this, for employment in general, for a stock exchange institution to run, many people are hired, creating thousands of jobs, ranging from blue-collar work, such as ones of security guards, to white-collar profession of skilled labourers and top-level management.
Importance of stock markets on larger scales:
The positive power that bears with stock markets does not only affect individual person or businesses involved; it can influence the economies of the countries where stock markets resides and even of the world as a whole.
Activities in stock exchanges are crucial forces that stimulate development or change within economic activity, and can “influence or be an indicator of social mood” (Wikipedia, 2009). The condition of stock exchanges is often a primary indicator of the strength, healthiness, development of an economy. An economy with stock market doing well, or “on the rise”, that economy is regarded as “an up and coming economy” (2009). That is, increasing prices of stocks, for example, indicate extended business investment, and thus more productive activities, of companies or corporations and vice versa.
Also, when all these activities, which come with the running of stock markets, function smoothly, economic growth can be facilitated. Actually, when companies or corporations are doing well with high productivity indicated by the rising prices of their stocks, they tend to produce more goods and services, one advantage of which is giving themselves the advantages of economies of scales. Further, as mentioned earlier about stock exchanges acting as clearing house to eliminate or fight against risks for both sellers and buyers of stocks, the businesses are operating with lower levels of risks. “[L]ower costs and lower enterprise risks promotes the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity” (Wikipedia, 2009).
Bibliography
Bonello, Frank J. “Stock Exchange.” Microsoft ® Student 2008 [DVD]. Redmond, WA: Microsoft Corporation, 2007
The Mirror, (2009, January 21). Cambodia will start the first stock market in December, but will not be successful as planned. Retrieved July 06, 2009, from http://cambodiamirror.wordpress.com/2009/01/22/cambodia-will-start-the-first-stock-market-in-december-but-will-not-be-successful-as-planned-wednesday-2112009/
Wikipedia, the free encyclopedia. Retrieved Retrieved July 6, 2009, from http://en.wikipedia.org/wiki/Stock_market
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