Stock Exchanges – Understanding Their Role in the Financial World

Kimiko G. Judith

It’s no secret that the economy has been struggling over the past few years. Between a crumbling housing market and a credit card industry that’s pretty out of control, people have become very skeptical of putting their money into the hands of anyone that they don’t know personally and trust. The flip side of this issue is that people are also looking to make a quick recovery from these financial woes, so they’re interested in ways to grow their money faster, and that means investing in the stock market. If you’ve never considered investing publicly before, it could be helpful to learn a little bit more about the stock market and its role in the financial world.

The first stock exchange could be traced back to the early exchange courts in France, where courtiers de change managed and regulated agricultural debts for the banks. Because these courtiers sometimes traded the debts to each other for profit or positioning, they are considered to be the first stock market traders. It was not until 1792 that merchants in the newly formed United States met together at the outskirts of New York City to form the New York Stock & Exchange Board on what would later become Wall Street.

Depending on the country and the state of the economy, the stock exchange can perform one of several functions for the financial community. One of the most basic purposes for the stock market is to provide a place that companies can come to raise capital for their day to day operations that is a cheaper alternative to high interest loans from a bank. Capitol gathered by companies through public investments doesn’t have to be paid back, but in exchange, they provide their investors with a share of ownership in the company that can be used as currency in the market.

Another one of the most important roles of the stock market is to act as a national barometer of the entire economy. When the stock market is up and the trading is vigorous, it can safely be assumed that the GDP is also up, meaning that people are making and spending money rapidly. When the stock market is down, and trading is slowed or stopped, it is usually a good indication that something is affecting the GDP negatively. This can be anything from political upheaval to a high unemployment rate. This barometric quality of the market is why small exchanges like the Dow can still have so much power.

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