Why does the stock exchange exist?
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The following article is part of an ongoing educational series. The previous article can be found here.
By this stage in our educational series, you may be starting to wonder how the stock exchange became the enterprise it is today, perhaps why it even exists at all.
After all, you could easily buy a share in your cousin's fishing business, your nephew's web design studio, or start up a business of your own if you had the inclination - all with no need for any stock exchange.
One way or another, stock exchanges have been around for hundreds of years, with each market serving exactly the same purpose. They link people who have surplus money with groups of people who need it.
The stock exchange is simply an efficient way of shuffling around society's resources to enterprises that will use them to build wealth or, more accurately, to try to build wealth.
Each transaction has three main players: you the shareholder, the company, and the stockbrokers who facilitate and advise on the handing over of money, for which they earn commissions.
The stock exchange makes it all formal and legal, allowing share purchases and sales to be recorded and settled. ASIC provides oversight, including the set of rules and regulations, to keep things reasonably sane. This includes different forms of protection for shareholders.
Of course, the stock exchange didn't just appear one day out of thin air. In fact, some of the earliest financial instruments were not shares at all but government bonds.
The Crusades that swept across Europe between the 11th and 13th centuries were partly financed by bonds - although the payoff to lenders was not always in cash like it is today, but in land and favours.
Just as governments were finding that bonds were a great way to raise cash, companies started to offer investors equity or part ownership in their own projects. Grand voyages involving mysterious spices and exotic ports would be set up, completed, and investors would get their principal back, plus or minus their return.
The whole thing was a bit clumsy until someone twigged that there wasn't much point in giving everyone's money back after each project - the company would only be asking for it again anyway - and modern companies slowly evolved along with share trading.
The first official stock exchange was opened in Amsterdam in the 17th century and the first company to trade its shares was the Dutch East India Company in 1602.
However, it wasn't until the industrial revolution that equity investment became a formalised activity.