Stock market – what is the stock market?
Stock market is the generic term for public markets where shares are regulated or issued over-the-counter, bought and sold. The stock market is a public market where companies can issue shares and investors can trade stocks. Stock exchanges such as the Frankfurt Böse or the stock exchange in Stuttgart are part of the stock market. An efficient and functioning stock market is considered critical to economic development as it offers companies the opportunity to raise capital from investors.
What are the tasks of the stock market?
The stock market takes on two very important functions. The first is to provide capital for companies to help them finance and grow their businesses. Deducted from the proceeds of sale of the shares are fees for the trading center and usually managed for the bank from which the shares are sold on behalf of the company. By selling shares instead of raising the capital required for expansion in the form of loans or bonds, the company avoids the absorption of debts and the associated interest burden.
The second function of the stock market is to give investors the opportunity to participate in the profits of listed companies. Investors can benefit from two types of stock purchases. Some stocks pay regular dividends, allowing shareholders to earn a steady income. The other option is to sell stocks at a profit if the stock price rises above the purchase price.
History of the stock market
Although stock trading in Antwerp dates back to the mid-fifteenth century, the commencement of modern stock trading on a stock market is generally viewed as trading in equities of the East India Company in London. The establishment of the East India Company in London led to a new investment model: companies that offered shares that represented a fraction of the ownership of the company. Investing in such companies, which were often protected from competition by government-issued charter companies, became very popular due to the fact that investors could sometimes make massive profits on their investments. The company’s shares were issued on paper to enable investors to exchange shares with other investors. However, until the London Stock Exchange (LSE) was founded in 1773, there were no regulated exchanges in the UK. The New York Stock Exchange (NYSE) was founded in 1792. The Frankfurt Stock Exchange is much older. The foundation was already in 1585.
Stock market participants – investment banks, stockbrokers and investors
There are a number of regular participants in the stock market. Investment banks handle the IPO of shares. IPOs are typically purchased by major institutional investors such as pension funds or mutual fund companies. Stockbrokers buy and sell stocks for their clients. Customers can be both institutional investors and retail investors. Stockbrokers require an admission for trading. Stock analysts are hired by stockbrokers, mutual fund companies, hedge funds or investment banks. These are individuals who examine listed companies and try to predict whether a company’s stock prices are likely to rise or fall. Fund managers or portfolio managers, which include hedge fund managers and ETF managers, are important market participants because they buy and sell large volumes of stock and thus typically have a significant impact on a stock’s performance.
In 1997, this new trading segment on the Frankfurt Stock Exchange was opened by Deutsche Börse AG as a “Neuer Markt”. The aim was to improve the possibilities for raising capital on the stock market. According to this, particularly small and medium-sized enterprises, which are characterized by particularly innovative concepts, should be promoted. But even traditional industries should be better able to benefit from the stock market in the future. The aim of this concept is to bring together growth companies with risk-conscious investors. The high degree of transparency that companies allow by participating in this stock market makes them particularly attractive to investors. Through the active and timely information policy, growth perspectives can be appreciated particularly well. This in turn is a condition for future-oriented issue proceeds. The new stock market was constructed as a private-law stock market segment. Thus, a higher degree of freedom in stock trading on the stock market is ensured. The prerequisite for admission to this form of the stock market is the procedure for the public market. While the Frankfurt Stock Exchange decides on admission to this Regulated Market, Deutsche Börse AG today makes this decision for the TecDAX. However, simultaneous participation in both forms of the stock market is not possible.