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Chapter – 1

Stock Market History in World and In India

Importance of stock market in the economy

1. Corporate companies’ growth

Any company which is at its peak of plans and executions, if requires more funds than
available for its expansion can gather funds directly from the public through the stock
market. When any company faces such situation when it either doesn’t want to approach
an investor or a bank for its funding knocks the door of primary market in the stock
market. Here it offers a percentage of its shares to the public. This offering is called Initial
Public Offering (IPO). Public includes big institutions as well as retail investors. They
invest in the business by buying the IPO at the set price. This money through a certain
process goes to the company. The company gets the funding by selling a part of the
ownership to the public. This helps the company to work on its plans and expand the
business. An expanded business means more goods/service to the society. Thus more
goods/services are made available through the stock market.

2. Investor growth

After IPO is issued the stocks are available to the public in the secondary market. In this
market frequent buy-sell of the stocks take place. A stock sold at a high price than the
bought price brings profit and a stock sold at a low price than the bought price brings loss.
This buy-sell process is the backbone of the stock market. So when traders/investors get
profit from the stock market they have more money to spend and when they are at a loss
they have lesser money to spend. Thus when there is a Bull Run, more money is available
to the society but when Bears take charge society lives in lesser money. Here society is
referred collectively to the traders/investors participating in the stock market.

Coming out of the hypothetical situation to the real world. There are different companies for
different services/goods. Replace all people of the society with the percentage of the society
participating in the stock market. The impact is still the same. Demand increases with profits and
decreases with the loss. 

1. Helping government

There are times when a government wants to start a new project for the welfare of the
society but can’t arrange the funds for the same. The government also approaches the
stock market just like companies approach. The only difference here is that instead of
issuing IPO and gathering funds, a government issue bonds. Public invests in the bonds.
The government gets the money for the project and the public gets an assurance of an
increase on their investment in the bonds.

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Such projects are aimed at various developments of society thus in return improves the
economy.
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2. Banks and institutions

We all get some interest on our deposits in the various saving schemes in banks and
institutions (LIC etc.). Bank provides some interest even on the simple saving accounts.
One of the major source of banks and institutions to earn money is stock market. They
invest the depositor’s money in the stock market and earn a profit. A small part of this
profit is returned as an interest to the depositor.

These banks and institutions play a very important role to keep a nation’s financial status
stable. The stock market keeps them alive and healthy, thus impacting the economy of a
country.

3. Savings

The stock market has opened a new world of saving options for common people. Most
commonly used stock market saving-options are Mutual Funds and SIP. The best part,
these options give a very high return on the same amount of savings as compared to
conventional saving options.

More return means more money to spend leading to a better economy.

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4. Economic Barometer

The stock market of a country is seen as one of the economic barometers. Usually, indices
of a leading stock exchange is considered for the same. A continuous healthy condition
attracts more investment from local and foreign investors. This, in turn, increases the
economic health of a country.

The Role of the Stock Exchange in the Economy

You may be surprised to discover the number of stock markets blanketing the globe. In
countries around the world, stock exchanges are being used to help businesses raise capital and
give investors opportunities to back new and established enterprises. There is no geographical
limit or bias to the stock market,t which means that individuals from a diverse array of
countries can use stock markets to build wealth and invest responsibility. By any standard of
measure, the functionality and utility of the stock market is universal.

History of the Marketplace

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The first stock markets were established in 17th century London coffee houses. In place of the
sleek electronics and frenzied trading floors typical of today’s market, folks interested in
owning commercial shares of businesses came to places like Jonathan’s Coffee House. There,
innovators such as John Castaing posted stock and commodity prices for “marketable securities
in London,” according to the London Stock Exchange’s historical record. This was the
“earliest evidence of organized trading,” moving from coffee houses to an actual exchange on
March 3, 1801.

Raising Capital

Stock markets are, first and foremost, financial institutions established to help businesses and
entrepreneurs come together to buy, sell and trade shares for the purpose of providing capital
to enterprises that need it. Were it not for stock exchanges, entrepreneurs would be left to their
own devices to find investors, and consumers could wind up at the mercy of unlicensed and
unregulated financial products with no oversight. Emerging from the stock market system are
unique financial terms and concepts including initial public offerings, or IPOs, an international
acronym for new business stock introductions.

Servicing Investors

Another role of stock markets is to act as an intermediary for large and small investors seeking
to make money outside the realm of standard banking institutions. The role of a stock exchange
in an economy is to maximize return on savings that might otherwise languish in static bank
accounts with low returns. Stock exchanges promise and often deliver higher profits, and in
return, investors receive measures of assurance, diverse opportunities and flexibility. Further, a
stock exchange offers investors assurances via formal oversight on investments.

Indicator of Health

A stock exchange can serve as a barometer of a nation’s fiscal health, broadcasting the ups,
downs, trends and shifts of the domestic economy. According to financial website UpDown’s
Investment Education Center, the relationship between a society and its stock exchange is so
deeply embedded that analysts can influence both the domestic economy or the stock market it
relies on by signaling optimistic outlooks for even just one of the two.

Financial Accountability

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Sophisticated financial market systems require credibility and accountability if they are to
function on behalf of businesses and investors as interested in ethics as they are in profits. For
this reason, a stock exchange benefits from a formal structure upheld by rules, laws and
regulations. Management and operational standards set by governments, bureaus and agencies
overseeing stock exchange operations add authority and oversight to the institution, giving
stockholders, investors and businesses checks and balances necessary for investor confidence.

Economic Effects

The direct effect of stock market activity can impact a nation’s economy in multiple ways.
Stocks fall, spending stops, consumers lose confidence and a nation's financial state begins to
falter. Conversely, stocks rise, confidence spreads, spending and investments grow. A nation’s
mood can rise or fall on stock market activity and performance, which shows how important
the role played by a stock exchange can be in a society’s social and fiscal fabric.

Expanded Diversity

If one of the stock market’s roles is to bring together like-minded investors, exchanges also
serve as fiscal melting pots, giving minority businesses an opportunity to place shares of new
company assets before potential stakeholders who might not otherwise learn about diverse new
products were it not for the exchange. Few economies can hope to flourish without infusions of
new ideas, systems and opportunities -- all represented by cash -- which is why this confluence
of financial needs and wants regularly merges on the floor of a vibrant stock exchange.

History

There is little consensus among scholars as to when corporate  stock was first traded. Some see
the key event as the Dutch East India Company's founding in 1602, while others point to
earlier developments (Bruges, Antwerp in 1531 and in Lyon in 1548). The first book in history
of securities exchange, the Confusion of Confusions, was written by the Dutch-Jewish
trader Joseph de la Vega and the Amsterdam Stock Exchange is often considered the oldest
“modern” securities market in the world. On the other hand, economist Ulrike Malmendier of
the University of California at Berkeley argues that a share market existed as far back
as ancient Rome, that derives from Etruscan "Argentari". In the Roman Republic, which
existed for centuries before the Empire was founded, there were societates publicanorum,
organizations of contractors or leaseholders who performed temple-building and other services
for the government. One such service was the feeding of geese on the Capitoline Hill as a
reward to the birds after their honking warned of a Gallic invasion in 390  B.C. Participants in
such organizations had partes or shares, a concept mentioned various times by the statesman

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and orator Cicero. In one speech, Cicero mentions "shares that had a very high price at the
time". Such evidence, in Malmendier's view, suggests the instruments were tradable, with
fluctuating values based on an organization's success. The societas declined into obscurity in
the time of the emperors, as most of their services were taken over by direct agents of the state.

While the Italian city-states produced the first transferable government bonds, they did
not develop the other ingredient necessary to produce a fully-fledged capital market: the stock
market in its modern sense. In the early 1600s the Dutch East India Company (VOC) became
the first company in history to issue bonds and shares of stock to the general public. As
Edward Stringham (2015) notes, "companies with transferable shares date back to classical
Rome, but these were usually not enduring endeavors and no considerable secondary market
existed (Neal, 1997, p. 61)." The VOC, formed to build up the spice trade, operated as a
colonial ruler in what is now Indonesia and beyond, a purview that included conducting
military operations against the wishes of the exploited natives and of competing colonial
powers. Control of the company was held tightly by its directors, with ordinary shareholders
not having much influence on management or even access to the company's accounting
statements.

In England, King William III sought to modernize the kingdom's finances to pay for its
wars, and thus the first government bonds were issued in 1693 and the  Bank of England was
set up the following year. Soon thereafter, English joint-stock companies began going public.
London's first stockbrokers, however, were barred from the old commercial center known as
the Royal Exchange, reportedly because of their rude manners. Instead, the new trade was
conducted from coffee houses along Exchange Alley. By 1698, a broker named John Castaing,
operating out of Jonathan's Coffee House, was posting regular lists of stock and commodity
prices. Those lists mark the beginning of the London Stock Exchange.
One of history's greatest financial bubbles occurred around 1720. At the center of it
were the South Sea Company, set up in 1711 to conduct English trade with South America, and
the Mississippi Company, focused on commerce with France's Louisiana colony and touted by
transplanted Scottish financier John Law, who was acting in effect as France's central banker.
Investors snapped up shares in both, and whatever else was available. In 1720, at the height of
the mania, there was even an offering of "a company for carrying out an undertaking of great
advantage, but nobody to know what it is".
By the end of that same year, share prices had started collapsing, as it became clear that
expectations of imminent wealth from the Americas were overblown. In London, Parliament
passed the Bubble Act, which stated that only royally chartered companies could issue public
shares. In Paris, Law was stripped of office and fled the country. Stock trading was more
limited and subdued in subsequent decades. Yet the market survived, and by the 1790s shares
were being traded in the young United States. On May 17, 1792, the  New York Stock
Exchange opened under a platanus occidentalis (buttonwood tree) in New York City, as 24
stockbrokers signed the Buttonwood Agreement, agreeing to trade five securities under that
buttonwood tree.

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Roles
Raising capital for businesses
Besides the borrowing capacity provided to an individual or firm by the banking system, in the
form of credit or a loan, a stock exchange provides companies with the facility to
raise capital for expansion through selling shares to the investing public
Alternatives to stock exchanges for raising capital
Research and Development limited partnerships
Companies have also raised significant amounts of capital through R&D limited partnerships.
Tax law changes that were enacted in 1987 in the United States changed the tax deductibility
of investments in R&D limited partnerships. In order for a partnership to be of interest to
investors today, the cash on cash return must be high enough to entice investors.
Venture capital
A general source of capital for startup companies has been  venture capital. This source remains
largely available today, but the maximum statistical amount that the venture company firms in
aggregate will invest in any one company is not limitless (it was approximately $15 million in
2001 for a biotechnology company).
Corporate partners
Another alternative source of cash for a private company is a corporate partner, usually an
established multinational company, which provides capital for the smaller company in return
for marketing rights, patent rights, or equity. Corporate partnerships have been used
successfully in a large number of cases.
Mobilizing savings for investment
When people draw their savings and invest in shares (through an initial public offering or
the seasoned equity offering of an already listed company), it usually leads
to rational allocation of resources because funds, which could have been consumed, or kept in
idle deposits with banks, are mobilized and redirected to help companies' management boards
finance their organizations. This may 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 firms.
Facilitating acquisitions
Companies view acquisitions as an opportunity to expand product lines, increase distribution
channels, hedge against volatility, increase their market share, or acquire other necessary
business assets. A takeover bid or mergers and acquisitions through the stock market is one of
the simplest and most common ways for a company to grow by acquisition or fusion.
Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an
ordinary middle-class family, through dividends and stock price increases that may result
in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled
businesses may result in capital losses for shareholders.

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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 as minimum investment amounts are minimal.
Therefore, the stock exchange provides the opportunity for small investors to own shares of the
same companies as large investors.
Government capital-raising for development projects
Governments at various levels may decide to borrow money 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, in the short term, direct taxation of citizens to finance development—
though by securing such bonds with the full faith and credit of the government instead of with
collateral, the government must eventually tax citizens or otherwise raise additional funds to
make any regular coupon payments and refund the principal when the bonds mature.
Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share
prices tend to rise or remain stable when companies and the economy in general show signs of
stability and growth. A 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.
 New York Stock Exchange (NYSE)?
The New York Stock Exchange (NYSE) is a stock exchange located in New York City that is
the largest equities-based exchange in the world, based on the total market capitalization of its
listed securities. Formerly run as a private organization, the NYSE became a public entity on
March 8, 2006, following the acquisition of electronic trading exchange Archipelago. In 2007,
a merger with Euronext, the largest stock exchange in Europe, led to the creation of NYSE
Euronext, which was later acquired by Intercontinental Exchange, the current parent of the
New York Stock Exchange.

 What is Nasdaq?
Nasdaq is a global electronic marketplace for buying and selling securities. Nasdaq was created
by the National Association of Securities Dealers (NASD) to enable investors to trade
securities on a computerized, speedy and transparent system, and commenced operations on
February 8, 1971. The term, “Nasdaq” is also used to refer to the Nasdaq Composite, an index
of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost
technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, and Intel .

 What Is the London Stock Exchange (LSE)?

The London Stock Exchange (LSE) is the primary stock exchange in the United Kingdom and
the largest in Europe. Originated more than 300 years ago, the regional exchanges were
merged in 1973 to form the Stock Exchange of Great Britain and Ireland, later renamed the
London Stock Exchange (LSE). The Financial Times Stock Exchange (FTSE) 100 Share

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Index, or "Footsie", is the dominant index, containing 100 of the top blue-chip stocks on the
LSE.

The stock exchange is physically located in the city of London. In 2007, the London Stock
Exchange merged with the Milan Stock Exchange, the Borsa Italiana, to form the London
Stock Exchange Group.

 Understanding the London Stock Exchange (LSE)

London has long been one of the world's leading financial cities, well-known as a hub for
international trade, banking, and insurance. The history of the London Stock Exchange (LSE)
goes back to 1698 when broker John Castaing began posting the prices of stocks and
commodities at Jonathan's Coffee House, which was a popular meeting place for businessmen
to conduct trades. Castaing called his price list "The Course of the Exchange and Other
Things."

By 1801 it became clear that a formal system was needed to deter fraud and unscrupulous
traders. Brokers agreed to a set of rules and paid a membership fee to belong to the exchange,
thus paving the way for the first regulated stock exchange in London.

Through its primary markets, the London Stock Exchange (LSE) provides cost-efficient access
to some of the world’s deepest and most liquid pools of capital. It is home to a wide range of
companies and provides electronic equities trading for listed companies.

The LSE is the most international of all stock exchanges with thousands of companies from
more than 60 countries, and it is the premier source of equity-market liquidity, benchmark
prices, and market data in Europe. Linked by partnerships to international exchanges in Asia
and Africa, the LSE intends to remove cost and regulatory barriers from capital
markets worldwide.

 What Is the Shanghai Stock Exchange (SSE)?

The Shanghai Stock Exchange (SSE) is the largest stock exchange in mainland China.  It is a
nonprofit organization run by the China Securities Regulatory Commission (CSRC). Stocks,
funds, bonds, and derivatives are all traded on the exchange.

Requirements for the Shanghai Stock Exchange (SSE)

A company hoping to be listed on the SSE must meet the following requirements:

1. The company must have gained the approval of the CSRC.

2. It must have a total share capital of more than RMB (renminbi) 50 million.
3. The amount of publicly-offered stock must be greater than 25% of total issued
shares unless a company's total share capital is more than RMB 400 million, in which
case the percentage is reduced to only 10%.

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4. The company must not have committed any major illegal acts or financial report
falsehoods over the past three years.

The SSE requires that companies listed on the exchange prepare and disclose periodic reports
within the time limit specified in laws, administrative regulations, and various applicable rules.

 What is the Hong Kong Stock Exchange (HKG) .HK

The Hong Kong Stock Exchange (HKG) .HK is a member of the HKEX Group and the leading
venue for capital raising activity for Hong Kong and Mainland Chinese issuers. One of the
world's largest securities markets by market capitalization, the Hong Kong Stock Exchange
traces its origins to the founding of China's first formal securities market, the Association of
Stockbrokers in Hong Kong, in 1891. A second market opened in 1921, and in 1947 the two
merged to form the Hong Kong Stock Exchange.1 The exchange introduced automated
ordering in 1993 and stock option trading in 1995.2 3 It merged with the Hong Kong Futures
Exchange and the Hong Kong Securities Clearing Company in 2000 to form Hong Kong
Exchanges and Clearing Ltd., a publicly-traded company.4 Due to the dominance of electronic
trade

Hang Seng Index – definition and meaning

The Hang Seng Index or HSI is the barometer of the Hong Kong stock market. It is the
market capitalization index of Hong Kong’s top fifty companies, i.e. those that appear on the
Hong Kong stock exchange.

The Hang Seng Bank administers the Hang Seng Index. In fact, Hang Seng Bank owns the
Hang Seng Indexes Company (Hang Seng Indexes). The Hang Seng Indexes manages a family
of indexes, including the Hang Seng Index.

Hang Seng Bank is the leading index compiler covering not only Hong Kong’s market, but
also those of mainland China.

The HSI is one of Hong Kong’s earliest stock market indexes. Operating since 1969, it is today
the leading indicator of the performance of the Hong Kong stock market

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