stock market/exchange

capital market

A MARKET which deals in the buying and selling of company STOCKS and SHARES and government BONDS. The stock market, together with the MONEY MARKET (which deals in short-term company and government securities), are the main sources of external capital to industry and the government.

Institutions that are involved in the UK Stock Market include MARKET MAKERS (who perform JOBBING and STOCKBROKING functions), specialist stockbrokers, ISSUING HOUSES, MERCHANT BANKS, and, as general buyers and sellers of securities, the CENTRAL BANK, COMMERCIAL BANKS, PENSION FUNDS, INSURANCE COMPANIES, UNIT TRUSTS and INVESTMENT TRUST COMPANIES, together with private individuals, industrial companies and overseas investors and institutions.

The stock market performs two principal functions. It provides:

a primary or ‘new issue’ market where capital for investment and other purposes can be raised by the issue of new stocks, shares and bonds (see SHARE ISSUE);
a secondary market for dealings in existing securities (see SPOT MARKET), including forward dealings (see FORWARD MARKET), which facilitates the easy transferability of securities from sellers to buyers (see SHARE PURCHASE/SALE). Day-to-day movements in the prices of shares (and other securities) are recorded by various SHARE PRICE INDICES, for example, the FTSE-100. See EQUILIBRIUM MARKET PRICE.

In the UK, the London Stock Exchange is the country's main centre for dealings in securities, supported by five provincial exchanges (Glasgow, Liverpool, Birmingham, York and Belfast).

In order to obtain a full listing or quotation on the London stock exchange for their shares, companies must satisfy various, requirements, including proof of their financial standing and previous business history, and be prepared to issue at least 25% of their shares to the investing public. Additionally, smaller companies can raise capital without obtaining a full listing through the ALTERNATIVE INVESTMENT MARKET.

In recent years, stock markets worldwide, such as those based in London, New York, Tokyo, Zurich and Paris, have become increasingly interdependent with the growth of MULTINATIONAL ENTERPRISES whose securities are traded on a number of exchanges while financial institutions and securities firms themselves have become more internationally based. This has led to an increase in competitive pressures, which has brought about a number of important changes, particularly in the case of the UK stock market, including:

the so-called big bang - the termination (under the prodding of the OFFICE OF FAIR TRADING) of the CARTEL arrangements for fixing minimum commissions on securities transactions and the ending of the traditional division between the stockbroking and jobbing functions;
various mergers and joint ventures between UK securities firms and international securities and banking groups, so as to provide clients with a more diversified range of financial services and geographical spread;
the computerization of dealing systems, using the Stock Exchange Automated Quotation System (SEAQ) which provides a mechanism for linking buying and selling transactions on a global basis. This has largely transferred day-to-day business from a physical presence on the stock exchange floor to telephone exchanges and the use of VDU computer terminals in dealing rooms.

In recognition of the growth in international dealings, the London Stock Exchange merged in the 1990s with the International Securities Regulatory Organization (ISRO) which represented the big international securities firms. In November 1999, a new competitive stimulus emerged when the London Stock Exchange set up a new sub-exchange (Techmark) for the listing of shares in high tech companies, only to be followed days later by NASDAQ (the US high tech stock exchange) setting up a rival exchange in London as part of its plan to build a pan-European operation. In addition, the London Stock Exchange has faced competition from Tradepoint, an electronic stock exchange based in London and owned by a consortium headed by Reuters and a number of American investment banks and fund management groups. Like NASDAQ, Tradepoint aims to build a pan-European trading system.

In 2000 the Paris, Amsterdam and Brussels stock exchanges merged to form the ‘Euronext’ exchange, and SWX, the Swiss stock exchange, joined up with Tradepoint to form the Virt-X exchange. Also in 2000 hostile bids for the London Stock Exchange by the German exchange, Deutsche Bourse, and the Swedish exchange failed. However, in 2005, the Deutsche Bourse and Euronext both put in hostile takeover bids for the London Stock Exchange. (Watch this space!)

In 2001 Euronext took over the LONDON INTERNATIONAL FINANCIAL FUTURES EXCHANGE (LIFFE) to form a combined ‘spot’ and forward exchange facility. See FORWARD MARKET.

On the UK stock market, transactions (transfers and settlements) are processed by the TALISMAN and CREST systems using a rolling settlement procedure which has replaced the traditional ACCOUNT PERIOD arrangement. The UK stock market is a Recognized Investment Exchange, and operates under the regulatory framework laid down by the FINANCIAL SERVICES ACT 1986. See FINANCIAL SYSTEM, CITY CODE ON TAKEOVERS AND MERGERS, INSIDER DEALING, SPECULATION, DUAL CAPACITY, SINGLE CAPACITY, PORTFOLIO, INDIVIDUAL SAVINGS ACCOUNT, LONDON INTERNATIONAL FINANCIAL FUTURES EXCHANGE (LIFFE), EUREX.