CHAPTER 2

The Stock Exchange Club

There are 60 major stock exchanges spread throughout in the world, with the largest being the United States-based New York Stock Exchange (NYSE), which has a market capitalization of $18.5 trillion. This equates to a third of the world’s listed companies.

Club Members

Out of the 60 exchanges, only 16 exchanges form part of what has been called the “Trillion Dollar Club.” This group makes up 87 percent of the world’s total value of equities and adds up to $59 trillion.

Who Dominates?

From a geographical perspective, North America and Europe control 60 percent of the world’s markets, while Asia’s 33.3 percent control comes from Shenzhen, Hong Kong, Tokyo, and Shanghai.

The southern hemisphere is dominated by exchanges in Australian, Indonesia, Johannesburg, and Brazil.

Typical Structures

There are two types of securities exchanges:

Structural Differences

National Stock Exchanges

These offer various forms of securities, including futures, forex, options, and bonds, driven by price and normally has stringent qualifications to be listed.

Regional Exchanges

Over-the-Counter Markets (OTC)

Some Exchange Listing Requirements

Listing schedules or requirements are effectively a set of conditions that companies must meet before they can become publically listed on an exchange. These conditions include profitability, years in operation, number of shares to be issued, and capitalization.

Therefore, companies must meet an exchange’s requirements to have their stocks and shares listed and traded there, but requirements vary by stock exchange:

Who Owns Global Exchanges?

In the past decade stock exchanges around the world have started to unbundle, which means that the members of exchanges started to sell their shares and these exchanges in turn became a listed company.

In this way the shares are listed on a stock exchange.

Other Types of Exchanges

These include exchanges to trade forward contracts on commodities, also called future contracts. Today, these exchanges also offer future contracts on interest rates, shares, and options.

These are today commonly known as futures exchanges.

Benefits of Exchanges

If the stock market is, indeed, the engine room of the economy, the investor can actually predict how the economy will behave in future. Or can he? Let’s look at this logically.

First, companies from across the entire spectrum of industry and commerce gather at the exchange to raise capital from the public. This allows them to expand, which—in turn—promotes new jobs, products, services, and business opportunities. As profits improve, dividends are paid out to investors, who often use these to buy shares in other listed companies and, thus, the cycle of economic prosperity continues to expand.

This theory would work well if the markets continued to move on fundamentals only. What happens if the economy looks healthy, has strong growth potential, but the stock market corrects strongly. Does this mean that in 10 months’ time the economy will take a nosedive? Not so!

In 1990, as a young junior analyst I was told: “We don’t just analyze companies—we analyze the factors that affect shares.” In other words, market sentiment plays a crucial role. So, assuming the economy is healthy and the market falls on some negative political comment or perceived threat—what does the portfolio manager do?

Well, that is really up to you. Needless to say, always look at the fundamentals of a particular stock. If the stock is all that you believe it is, then sentiment is just that—sentiment. The share often bounces back quickly and market volatility provides the trader with a market opportunity to buy.

Conversely, if market sentiment pushes a share price beyond its true value, the share will be expected to fall back within a short period of time. This provides investors with a sell opportunity.

Comment

At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth.

An economic recession, depression, or financial crisis could eventually lead to a stock market correction. Therefore, the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

Chapter 3 sets out ownership of the stockbroking firm and how it functions.