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Share ArticleWhat is the stock exchange and why is it important for business?
The history of the stock exchange as a market with buyers and sellers of securities goes back to the XIII century, when the first joint—stock company was founded in Toulouse. Following this, several squares and trading posts were established to facilitate meetings between merchants. The first square to possess the attributes of a modern stock exchange was the Rialto Stock Exchange in Venice. Over time, such stock markets moved from exchanging only bonds to exchanging stocks and commodities.
These physical meetings gradually dematerialized and evolved into the stock exchange as we know it today. It represents a digital exchange between those who need financing (government and companies) and those who have the ability to finance (savers and certain financial or public institutions). Today, there are many stock exchanges located in major financial and political centers around the world.
What is a stock exchange for?
A stock exchange serves as a unique meeting place where thousands of people can exchange financial products. It facilitates the financing of companies and public institutions and at the same time regulates prices by balancing supply and demand. In this way, transactions become efficient, safe and fair. And capital is allocated among the various participants in the most efficient way possible.
People on the financial exchange who have money to invest are investors. They can be individuals seeking to effectively manage their personal finances, or they can be professionals who have made it their job. Banks, financial institutions, insurance companies and pension funds act as intermediaries between investors and financial markets.
The stock market serves two main functions for investors:
- It allows them to put their money at the disposal of companies in need of financing. In this way, investors can participate in the development of projects or companies;
- It offers them the opportunity to invest their unused funds to grow either through regular income (dividends and coupons) or capital gains.
What is an initial public offering or IPO?
The simplest form of public offering is an IPO (Initial Public Offering), that is, an initial public offering. Companies that decide to go public often have many years of experience and, due to their ambitions, face financing problems that banks cannot always solve. This is why there is a need to turn to the stock market to raise the capital needed for financing. Often companies come to the stock market looking for a way to expand or even go international. Without "new money," it is difficult for a company to consider expanding its operations, even if it means missing out on certain opportunities.
Listing a company (i.e. officially listing securities on the stock market) can also be a way for managers to sell shares in their company and/or to attract large partners who will support them for several years and help them with their projects. There may be other reasons for raising capital. For example — to increase its prestige. Listing is a fantastic way to make yourself known and one of the most effective forms of advertising for a young company looking to gain more commercial exposure.
A second example of the usefulness of the stock market is when a company that is already listed uses the market to raise public savings through a capital increase or fund raising. This transaction takes place at a general meeting of shareholders and can be used to finance a strategic acquisition or to support an expensive development project.
In addition, for a company in financial difficulty, going public can be a new opportunity to get back on its feet and try to begin life with a clean slate. with strengthened equity and cash flow.
How does this work in practice? A company can conduct a procedure by granting existing shareholders a negotiable right known as a 'subscription right' or by issuing shares that can be purchased by new shareholders. The subscription right allows shareholders to subscribe for new shares in proportion to the number of shares they already own and receive financial compensation if the right is not exercised. This system of pre—emptive rights prevents the dilution of capital by too many small shareholders.
In short, a capital increase is an effort by listed companies to increase their capital by issuing new shares. In most cases, shareholders have pre—emptive rights, which gives them the opportunity to participate in capital increases on a priority basis, even if they are not obliged to follow the operation systematically, depending on their own investment strategy or current financial resources as part of prudent management of their savings. IPOs and capital increases often provide stock market investors with the opportunity to gain a stake in a company, provided they follow sound advice from stock market and financial professionals to avoid making bad decisions.
Benefit to the government
The stock market is useful at the individual and corporate level, but we should not forget that it benefits the states as well. A state is an economic player like any other that has funding needs. When not enough money comes in to cover expenses, it issues bonds to finance its debt obligations, which are also traded on the stock market.
In addition, the stock market is also a tool of control. Companies that participate in it are subject to clear rules set by the government. In France, this regulator is the Authority for Financial Markets (AMF), and in Germany, the Federal Financial Supervisory Authority (BaFin). Each country has its own bodies to control stock exchange activities.
With the help of the stock market, the government can direct investments to finance a project that will benefit society. This is exactly what happened with the development of socially responsible investment (SRI) and the introduction of green bonds. Thus, the stock market serves to finance the economy. It is useful not only for investors, but also for society as a whole, and without its activity is necessary for the functioning of the world economy.
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