Stock Marketing Part 2

 History of Stock Marketing 

During the 12th century in France, courtiers de change managed and regulated the debts of agricultural communities for banks. These men were also involved in trading debts and are considered the first brokers. In the late 13th century, commodity traders met at a market square in Bruges owned by the Van der Beurze family, and in 1409, they institutionalized their meetings, forming the "Brugse Beurse." The idea quickly spread, and "Beurzen" soon opened in neighboring countries. The word for stock market exchange derived from the Latin word "bursa," which also meant money bag and the name of the Van der Beurse family.

In the 13th century, Venetian bankers began trading government securities, and by the 14th century, bankers in Pisa, Verona, Genoa, and Florence also began trading. Italian companies were the first to issue shares, with English and Low Countries companies following in the 16th century. Joint stock companies, whose stock is owned by shareholders, emerged and became important for the colonization of the New World. Stock markets now exist in virtually every developed and most developing economies, with the largest markets being in the United States, United Kingdom, Japan, India, China, Canada, Germany, France, South Korea, and the Netherlands.

Importance

Before perestroika, socialism was not a monolithic system, and the spectrum of socialism varied within Communist countries. From Yugoslavia's quasi-market, quasi-syndicalist system to Albania's centralized totalitarianism, socialism took on different forms. The question of at what point a country could be designated as socialist or not was not easy to answer. However, according to Professor von Mises, the presence of a stock market is crucial to the existence of capitalism and private property. Without a functioning market in the exchange of private titles to the means of production, there can be no genuine private ownership of capital. This means that there can be no true socialism if such a market is allowed to exist. To learn more about economics and related topics, visit

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Function and purpose

Companies can raise money through various means, with the stock market being one of the most significant ways alongside debt markets, which typically have stricter regulations but are not publicly traded. By selling shares of ownership of the company in a public market, businesses can become publicly traded and raise additional financial capital for expansion. One of the advantages of investing in stocks is the liquidity that an exchange provides to investors, enabling them to easily and quickly sell securities. This makes stocks more attractive than other investments that may be less liquid, such as real estate and other immovable assets. For more information on investing and related topics, please visit our website.

Throughout history, the price of stocks and other assets has played a significant role in shaping economic activity and can even serve as an indicator of social sentiment. A thriving stock market is often associated with a burgeoning economy, and it's typically considered the primary gauge of a country's economic strength and development.

Share prices can impact business investment, as rising prices may lead to more investment while falling prices may result in decreased investment. Additionally, share prices affect household wealth and consumption, prompting central banks to closely monitor the stock market and ensure the smooth operation of financial systems to maintain financial stability.

Exchanges play a crucial role in facilitating stock market transactions by acting as clearinghouses and guaranteeing payment to the seller. This eliminates the risk of default on the part of the buyer or seller.

A well-functioning financial system that minimizes costs and enterprise risks can contribute to economic growth, production of goods and services, and employment opportunities. However, there's ongoing debate about whether the optimal financial system is bank-based or market-based.

Recent events, such as the Global Financial Crisis, have highlighted the importance of market microstructure in maintaining the stability of the financial system and preventing systemic risk transmission, leading to increased scrutiny of the structure of stock markets.

Relation to the modern financial system

The shift from human trading of listed securities to electronic trading is known as a transition or transformation.[26]

Behavior of stock prices

External factors such as socioeconomic conditions, inflation, and exchange rates are the primary drivers of changes in stock prices. Conversely, intellectual capital is not a significant contributor to a company's stock's current earnings, but it does play a crucial role in generating long-term return growth for investors.

The efficient-market hypothesis (EMH) posits that asset prices incorporate all relevant information at any given time. However, the "hard" version of this theory fails to account for events such as the 1987 market crash, which saw the Dow Jones Industrial Average experience its largest single-day drop in US history, plummeting by 22.6%. [29]

The occurrence of sudden drops in stock prices without an apparent cause is an indication of the randomness of such events, although they are rare. While the Efficient Market Hypothesis (EMH) predicts that price movements in the absence of new information are random, studies have shown that the stock market tends to trend over longer periods. The distribution of stock market prices is non-Gaussian, and psychological factors can result in exaggerated stock price movements. For example, investors tend to overreact positively to a succession of good news items about a company, driven by a boost in self-confidence. Group thinking and herding behavior also influence stock market behavior, especially in times of market stress. Stock markets play a crucial role in transferring funds between units that have excess funds and those that suffer from funds deficit. Stock prices are affected by macroeconomic trends, such as changes in GDP, unemployment rates, national income, price indices, output, consumption, inflation, innovation, and international trade. Low P/E ratio and smaller-sized companies have a tendency to outperform the market.

Irrational behavior

The stock market can sometimes exhibit irrational behavior in response to economic or financial news, even if the news is not expected to have a significant impact on the underlying value of securities.[39] However, this behavior may be more apparent than real, as such news is often anticipated and can result in a counter-reaction if the news is better or worse than expected. The stock market can be influenced by various factors such as press releases, rumors, mass panic, and euphoria, leading to unpredictable behavior in the short term.

Investors may make irrational decisions when making investment choices, resulting in incorrectly priced securities and market inefficiencies, providing opportunities to earn profits, as argued by behaviorists.[40] Nevertheless, the Efficient Market Hypothesis (EMH) posits that these non-rational reactions to information cancel each other out, leading to stocks being priced rationally.

Crashes

A sharp decline in the prices of stocks listed on stock exchanges is often referred to as a stock market crash. Panic and loss of confidence among investors, in addition to various economic factors, can contribute to such crashes. Such crashes often bring an end to speculative economic bubbles.

Throughout history, there have been several notorious stock market crashes that resulted in the loss of billions of dollars and massive wealth destruction. As more and more people invest in the stock market, especially since social security and retirement plans are being increasingly linked to stocks, bonds, and other market elements, the potential impact of these crashes on individuals' financial well-being becomes more significant. Some of the most famous stock market crashes include the Wall Street Crash of 1929, the stock market crash of 1973-1974, Black Monday in 1987, the Dot-com bubble of 2000, and the Stock Market Crash of 2008.

The second edition of the book Irrational Exuberance includes a graph that shows the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates. Author Robert Shiller cautions readers in the preface that the stock market has not returned to historical levels, with the price-earnings ratio still in the mid-20s in 2005, much higher than the average. Shiller believes that people still have too much confidence in the market and an unwarranted belief that monitoring their investments will make them wealthy. This overconfidence can lead to insufficient preparations for negative outcomes.

1929

The Great Depression was sparked by one of the most well-known stock market crashes, which began on Black Thursday, October 24, 1929. The Dow Jones Industrial Average saw a 50% decline during this crash, leading to widespread economic devastation.

1987

In 1987, the world witnessed another major stock market crash known as Black Monday. It began in Hong Kong and quickly spread globally, causing stock markets in several countries to plummet, including a 45.5% drop in Hong Kong, a 41.8% drop in Australia, a 31% drop in Spain, a 26.4% drop in the United Kingdom, a 22.68% drop in the United States, and a 22.5% drop in Canada. The Dow Jones Industrial Average fell by a staggering 22.6% in a single day, making Black Monday the largest one-day percentage decline in stock market history.

The reasons for the crash were not immediately clear, as no significant news or events predicted the catastrophe. The crash challenged some fundamental assumptions of modern economics, such as the theory of rational human conduct, the theory of market equilibrium, and the efficient-market hypothesis. Trading on stock exchanges worldwide was halted for some time after the crash due to the overwhelming number of trades, which caused exchange computers to malfunction. This pause in trading allowed central banks, including the Federal Reserve System, to take measures to control the spreading financial crisis. The Securities and Exchange Commission (SEC) in the United States introduced new measures of control into the stock market to prevent a recurrence of the events of Black Monday.

The plot in Figure 10.1 by Robert Shiller shows the relationship between Price-Earnings ratios and twenty-year returns. The x-axis represents the real price-earnings ratio of the S&P Composite Stock Price Index, while the y-axis represents the geometric average real annual return from investing in the same index, including reinvested dividends and selling after twenty years. The data from different twenty-year periods are color-coded for easy interpretation. Shiller's analysis of the plot confirms that long-term investors who commit their money to an investment for ten full years have a higher chance of performing well when prices are low relative to earnings at the start of the investment period. As such, Shiller advises individual investors to reduce their exposure to the stock market when prices are high, as they have been in recent times, and increase exposure when prices are low.

2007-2009

The Great Recession began in 2007 and lasted through 2009, causing one of the sharpest declines in financial markets in decades. The effects of the recession were far-reaching, affecting not only the stock market but also the housing market, lending market, and global trade. The housing bubble burst due to sub-prime lending, leading to major banks and financial institutions failing and requiring significant government intervention. This was depicted in movies like The Big Short, where homeowners were unknowingly taken advantage of by lenders. The S&P 500 fell by 57% from October 2007 to March 2009 and didn't return to its pre-recession levels until April 2013.

Circuit breakers

In recent decades, many of the world's largest stock exchanges have transitioned from open outcry systems to electronic 'matching engines', which connect buyers and sellers electronically. As a result, electronic trading now dominates in many developed countries. In order to accommodate the increased trading volumes and ensure accuracy and control, stock exchanges have upgraded their computer systems. The SEC has also revised the margin requirements to reduce the volatility of common stocks, stock options, and futures markets. To prevent sharp declines in the stock market, the New York Stock Exchange and the Chicago Mercantile Exchange have introduced the concept of a circuit breaker. This mechanism automatically halts trading if the Dow falls by a certain number of points within a specific timeframe. The Investment Industry Regulatory Organization of Canada (IIROC) has followed suit, introducing single-stock circuit breakers in February 2012.