Stock exchanges are secondary markets, where existing owners of shares can transact with potential buyers. It is important to understand that the corporations listed on stock markets do not buy and sell their own shares on a regular basis (companies may engage in stock buybacks or issue new shares, but these are not day-to-day operations and often occur outside of the framework of an exchange). So when you buy a share of stock on the stock market, you are not buying it from the company, you are buying it from some other existing shareholder . Likewise, when you sell your shares, you do not sell them back to the company—rather you sell them to some other investor.
The first stock markets appeared in Europe in the 16th and 17th centuries, mainly in port cities or trading hubs such as Antwerp, Amsterdam, and London.10 These early stock exchanges, however, were more akin to bond exchanges as the small number of companies did not issue equity. In fact, most early corporations were considered semi-public organizations since they had to be chartered by their government in order to conduct business.
First Stock Exchange
London’s government had outlawed the issuing of shares immediately after the South Sea Company had a negative impact on England’s economy. In 1773, the London Stock Exchange was formed but it wasn’t until 1825 that issuing shares became legal again in England. Because trade was limited and companies were unable to issue new shares, the London Stock Exchange was slower to develop than the New York Stock Exchange.
Today’s Market
In this day and age, nearly every country in the world relies on stock exchanges that reflect the fluctuations of the country’s economy. Even non-investors know the significance of having a healthy market and most keep their eyes on whether or not experts are worried about the condition of the stock market.
A stock market system keeps the free market system moving in a positive direction. The ability for companies to raise capital and fund their future projects allows those companies with a vision but not the necessary capital at their disposal to continue and achieve funding of their goals.
This system enhances and forces companies to adapt to the ever-changing landscape of performance criteria set by investors and other stakeholders. As a result, innovation and adaptation to the new rules and trends are inevitable.