History of Stock Exchanges

• The earliest concepts of stock, or capital stock, were derived from early, medieval notions of trade from Islamic sources--in particular, the Quran. By the 13th century, Italians embraced ideas in trading they encountered from across the Mediterranean and formed the first financial exchanges, primarily for trading in government securities issued by independent Italian city-states.
  
  Later financiers and philosophers evolved the ideas of trading, capital stock and market exchanges into modern concepts underlying capitalism. Adam Smith and Malachy Postlewayt notably affected colonial-era notions of capitalism and mercantilism. More recently, John Maynard Keynes and his economic rival, Friedrich von Hayek, influenced modern economic philosophy and stock exchanges.
  
  

Understanding Stock

• Stock, for its part, is the capital raised by a company through investors. Investors receive a stock certificate denoting how many shares of the capital they own, as a "stockholder." This certificate is also representative of the investor as an owner of the company, often providing them voting rights and the possibility of receiving dividends.
  
  

Stock Prices

• As with any market for goods, there is no governing body that determines the price of a stock. Instead, the price is determined by the market--the sum of activity between buyers and sellers.
  
  Because all participants seek to profit from their trades, sellers seek high prices while buyers attempt to purchase at the lowest prices. In the end, the ancient author Publius Syrius best described how stock prices are set when he said, "Everything is worth what its purchaser will pay for it."
  
  

Purpose of Stock Exchanges

• An exchange formalizes a market for stock, setting down rules companies must meet to be listed and governing the reporting and other requirements a company must uphold. Companies agree to these requirements as exchanges provide a vital service for them to raise money through stock investors. Investors prefer an organized market, such as an exchange, because they can more easily and safely find companies in which they are willing to invest.
  
  Additionally, a stock exchange provides a better information resource for companies and investors. This is in part due to reporting requirements, but also because of stock indexes that provide a barometer of economic health--such as the Dow Jones Industrial Average, or DJIA.
  
  

Market Crashes

• Occasionally, stock prices within a market suddenly plummet. These collective and rapid declines are known as "crashes." A crash may result from several factors, including economics, rumor and panic. In fact, the earliest Italian exchanges were formed in part because of negative rumors used to drive prices down.
  
  While an exchange cannot prevent a market crash--nor is it an exchange's duty--many major exchanges include "trading curbs." Curbs are activated when a crash occurs, and are intended to slow or even stop trading to lessen the financial severity of a market crash.