Role & Historical Background of Security Markets Essay Example

the company itself. The repurchase of a corporation's own common stock is known as treasury stock. Furthermore, the paragraph acknowledges the establishment of the Securities Exchange Commission (SEC) in 1934 as a regulatory body for securities.

The Securities and Exchange Commission (SEC) is the regulatory body for securities in the United States. Before 1929, each country regulated their own security activities. However, after the stock market crash of 1929 and the Great Depression, a regulatory entity was needed. The Securities Act of 1933 aimed to collaborate with small investors, prevent fraud in stock markets, and safeguard investments. This act also included provisions for reviewing financial reports related to security markets.

The Securities and Exchange Commission (SEC) regulates the securities market in various countries, requiring companies to register their financial instruments before selling them to the public. These regulations ensure comprehensive and fair disclosures, allowing investors to make informed assessments of different securities. The SEC also oversees stock trading and enforces measures against price manipulation, necessitating registration from brokers, dealers, and stock exchanges.

Additionally, the SEC mandates that companies publicly disclose when their officers buy or sell shares of their stock. This requirement is based on the belief that insiders possess significant information about their companies and that their trading activities can indicate confidence in future company performance.

According to Cunningham, et.al (1979), the Securities Exchange Commission (SEC) is responsible for providing information on various security markets and the individuals or organizations involved. It is crucial to disclose any hidden information to the public before selling any type of security in these markets. The SEC not only sets rules and regulations for current security markets but also focuses on establishing

and meeting the needs of future markets. The creation of the SEC aims to protect both small and large investors from fraud and other deceptive activities that may occur in capital markets. These effects are particularly harmful to small investors (Duncan, 1975). In addition, in the eleventh century, Muslim and Jewish merchants created a trading system with trade methods.

In the twelfth century, courratiers de change in France possessed extensive knowledge of various financial transactions and were familiar with all methods of credit and payments. They played a crucial role in managing and establishing rules for agricultural communities on behalf of financial institutions. This was essential as there were no technological advancements or modern financial institutions to regulate funds during that time period. Consequently, these individuals were pioneers in trading debt and are referred to as the original brokers who introduced the concept of selling debt equities, such as bonds, that we use today. Following their lead, many changes and developments occurred in the trading field during the thirteenth century.

The Bruges Beurse was founded in Bruges as a result of changes in trading activities, particularly commodity trading. This idea gained popularity and spread to other countries, leading to the development of securities trading and fund regulation in the mid-13th century. Venetian bankers played a crucial role by initiating the sale and trade of government securities, which helped establish rules governing their prices. Furthermore, cities such as Pisa, Verona, Genoa, and Florence also engaged in trading government securities. These advancements ultimately led to the introduction of joint stock companies from the Dutch, enabling shares to be issued and invested in various business ventures. A significant milestone occurred

in 1602 when the Dutch East India Company listed the first share on the Amsterdam stock exchange. Consequently, the Amsterdam Stock Exchange is widely recognized as the world's first stock exchange (Kolb et al., 1987).

The name of Amsterdam comes from its place of origin. In 2000, it merged with the Brussels Stock Exchange and the Paris Stock Exchange to form Euro Next. Today, this stock exchange is known as Euro Next Amsterdam. Stock markets involve the trading of common stock and its derivatives. Common stocks represent shares in various organizations and are listed on stock exchanges. The stock market facilitates the trading of company stocks.

There are various types of securities traded in stock markets, including those with different participants such as small investors and large organizations. Some stock exchanges use an open cry method, where exchange transactions are conducted on an open floor and bidding takes place for the securities being traded. This method is commonly used in stock and commodity exchange markets. However, other stock exchanges, especially those in developed countries, feature computer systems and do not employ open cry methods for trading securities.

(Koretz and Gene, 1994) In these countries, the stock exchanges rely on computer systems for trading, rather than traditional bidding at a physical location in the market. Many markets use an auction trade system for securities trading, where brokers participate by bidding on securities and determining their prices. (Koretz and Gene, 1994) When the bid and ask prices align, the stock is sold. These exchanges operate on a first-come, first-served basis for the sale of securities.

The primary objective of establishing stock exchanges in each state is to offer a convenient platform

for trading and selling securities. These exchanges function as marketplaces where the prices of stocks are determined, facilitating smooth financial transactions. An instance of such an exchange is the New York Stock Exchange (NYSE), where face-to-face transactions occur on an open floor. Being the initial stock exchange established in America, it implemented various measures post the 1929 crash to prevent market downturns. Consequently, this led to the creation of the Securities and Exchange Commission (SEC) in Philadelphia during 1790.

A group of 24 merchants established the New York Stock Exchange with the aim of gaining control over the securities industry in America. However, they were not pleased with their own stock exchange and thus sent a representative to Philadelphia in early 1817 to assess its operations.

The New York Stock and Exchange Board were formally organized upon arriving with news about the robust exchange in Philadelphia (Howarth and Hoffman, 1984). For many years, stock market participants were classified as buyers and sellers, mainly individual investors who belonged to the wealthy category, commonly referred to as large businessmen. However, with the introduction of information technology and the expansion of the market to include a larger number of investors, population growth, and income increase, the market size increased along with the size of stock markets worldwide. As industrialization took place and various changes occurred in the markets, they became more technological and industrialized, attracting participants from different enterprises as well as individual participants. Consequently, the large number of stock market participants shifted from individual businessmen to large business organizations and institutions. The increase in investments made in the markets contributed to the growth of financial markets, expanding their operations

beyond small organizations or individuals.

According to Persinger (1975), a wide range of large organizations and individual businessmen now engage in these operations. The formation of stock markets has become significant in contributing to the profits of various organizations and financial institutions in different countries. The presence of these stock exchanges guarantees the advantages for both large and small investors, protecting them from potential business disasters and losses. These markets serve as a platform where organizations receive assistance in raising funds. This enables the organizations to become public entities and secure substantial funds for investment in various projects.

Stock exchanges offer a highly liquid opportunity for organizations and companies to sell their securities easily. These markets are known for their efficient liquidity compared to the real estate market, which has less liquidity. The prices of shares and other assets related to financial transactions have great importance in economic development and contribute to raising economic activities. This, in turn, strengthens the social status of a country by increasing economic and financial activities between public and private investors. When the prices of shares in a company increase, it leads to increased business activities for the company and benefits the overall economic activities in the country, impacting households and their consumption. Many countries have strong financial institutions that regulate stock market activities. These stock market exchanges function like a clearing house, collecting securities and selling them to other buyers.

The stock markets have a significant impact on households in many countries, as people seek to invest directly or through mutual funds. However, over time, the noise level in the stock market keeps increasing. Television commentators, financial writers, analysts, and market strategists

all vie for investors' attention. Meanwhile, individual investors participate in chat rooms and message boards where they share questionable and often misleading tips. Despite the abundance of information available, it has become more difficult for investors to make a profit. Stock prices rise rapidly without clear justification and then plummet just as quickly. This situation leaves individuals who have invested for their children's education and retirement feeling fearful.

Sometimes the market can seem unpredictable and irrational, as Pettengill (1993) stated, "there appears to be no rhyme or reason to the market, only folly". Nowadays, the stock market consists of 300,000 computer network systems that are interconnected and exchange price information. These systems are connected to the world's stock exchanges through a network of 26 million computers. These computers provide data on financial transactions from various countries around the globe (Saunders and Edward, 1993).