Outline:
- The Dutch East India Company was the first company to issues shares of its business on a liquid market;
- Share trading is essentially a continuous auction, where buyers and sellers agree on a price for a share.
Every day, billions of dollars are traded on the world’s stock exchanges.
But, if you walk down the street and ask people what’s happening in the global markets, the response will be something like, "I don’t know, I’m not an economist".
The everyday person isn’t engaged with the financial markets. Yet, when we talk to our customers they tell us they want to understand, they just don’t know where to start.
We believe understanding financial markets is an important part of taking control of your financial future. It’s important to us that all of our customers have a basic understanding how financial markets work.
Investing requires constant education. So, let’s get started.
Beginning at the beginning
In the early 1600s, the Dutch East India Company (VOC) became the first company to issue bonds and shares of stock to the public. While there were other companies to issue shares before VOC,
“It opened up the ownership of companies and the ideas they generated, beyond the ranks of the aristocracy and the very rich, so that everyone could finally participate in the speculative freedom of transactions.
By expanding ownership of its company pie for a certain price and a tentative return, the Dutch had done something historic: they had created a capital market.” [1]
The reason was the very same reason companies IPO today; to raise money for their business.
Shortly after the formation of the Dutch East India Company, the Amsterdam Stock Exchange, later renamed to the Amsterdam Bourse began to trade VOC shares.
While many consider the Amsterdam Bourse to be the first stock exchange, Fernand Braudel argues in The Wheels of Commerce: Civilisation & Capitalism 15th-18th Century;
“All evidence points to the Mediterranean as the cradle of the stock market. But what was new in Amsterdam was the volume, the fluidity of the market and publicity it received, and the speculative freedom of transactions.”
However, it was the first modern stock exchange as we think of them today.
So how does the stock trading work?
An easy way to think about a stock trade is like an continuous auction, where new buyers and sellers come together to buy or sell a stock.
What buyers are willing to pay is called the bid price and what sellers are willing to sell for is called the ask price.
If you wanted the best price available when your order hit the exchange, you could ask your broker to send a market price order.
For buyers, orders are filled at the price a seller is asking and for sellers, order are filled at the price a buyer is bidding.
The gap between the two is called the bid-ask spread.
For example, if the bid price was $1.05 and the ask price was $1.10 then the bid-ask spread would be five cents.
The advent of computers has made trading stocks more efficient and convenient, meaning stocks change price of a second-by-second basis as new buyers and sellers come together.
A continuous auction works because it ensures a fair price is always paid. As the price will never be higher than what the lowest price any seller is willing to sell for.
Computers may have sped things up but the underlying idea has stayed constant.
A stock exchange is an organised market where stocks are bought and sold, an example is the ASX.
Summary
A stock exchange is a place for buyers and sellers to come together to trade shares, bonds and other securities.
The Blue Line Imperative: What Managing for Value Really Means. Kevin Kaiser, 2013. ↩︎
