Why Do The Financial Markets Exist?

The first kind of financial market was the stock market. As enterprises in the 17th Century became much larger than before, they could not be financed solely by the court, by the landed gentry or by the managers. There was a need to attract capital from the public at large. So the joint-stock company was invented, which gave buyers of shares the right to receive profits (if any) in the form of dividends from the company. That model still exists today and is a powerful means of recycling savings into commercial enterprises.

So financial markets exist to finance (hopefully) productive endeavours that aim to increase wealth of all citizens – it is the bedrock of the capitalist system that has taken over the world. Whether it achieves that aim is debatable, but will not concern us here.

Thus was the risk and/or reward of a commercial enterprise transferred to the investors, both public and institutional. Today, we are familiar with unit trusts (in the United Kingdom), mutual funds (in the USA), insurance companies, pension funds, sovereign funds, and so on.

We have seen the rise and rise of the cult of equities (shares) as our commercial endeavours have spread out world-wide, and the age of consumerism has likewise spread to bring increasing wealth and comfortable living to more and more people.

The stock market is thus a measure of man’s productive endeavours in that it reflects the aggregate confidence of the public towards present and future economic conditions.

Of course, it can work both ways – if public confidence is high and growing, stocks will generally rise in value. But when the mood is negative and falling, stocks will fall. We shall return to this in later sections.

Stockbrokers

Did I mention, you can’t actually go to a stock exchange and buy and sell shares for yourself? You have to go through someone who is authorized to deal there, and that is a stockbroker. There are many types of stockbroker, giving different facilities and charging different amounts for their services.

The traditional stockbroker such as your father may have used is only a phone call away, and will help and advise you on where to place your money. He makes it his business to research the companies, and tell you which he thinks are good investments. He makes money every time you buy and sell, and you have to trust he is not telling you to trade just to make more commissions – this does happen, and it is called ‘churning’ your account.

You don’t want that type of stockbroker when you are taking responsibility for your own trading. You want a broker who will give you access for trading the shares that you select, and who will give you “fast execution”, obeying your instructions right away while the shares are at the price you want. The Internet has changed the face of stock broking, and there are many online brokers who can provide a reasonable and efficient service. You should check out several before deciding which to use, based on cost, ease of use, and recommendations.

Depending on the type of trading that you intend, there is another option – with a fast internet connection and for a monthly fee you can have what is called a Level II screen, and this gives you immediate access to what the broker sees. This shows pending orders that haven’t been satisfied. For instance, if a stock is trading at 97.5, it may show that someone would like to buy 500 shares at 97.4, if only the price came down that much, and that someone else would like to sell 2000 shares at 97.55, if only the price would go up to that. If you are daytrading, then it’s useful; if you don’t need it, then don’t bother.

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