Stock exchange: meaning, history, and facts

Glossary

What is a stock exchange?

A stock exchange is an officially recognised, regulated market where buyers and sellers come together to trade investment products via an intermediary connected to the exchange. It is a place where, for example, bonds and stocks are bought. The Euronext and Nasdaq are well-known examples of exchanges where thousands of transactions take place daily.

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The history of the stock exchange

The stock exchange has a rich history. Trading in loans and early financial constructs already existed in antiquity. However, meeting places for traders only emerged centuries later, such as in Bruges in the 13th century.

The concept of a trading place then quickly spread throughout Europe. In the 16th century, the first stock exchange buildings appeared, such as in Antwerp and London, where securities and goods were traded. In Amsterdam, the stocks of the Dutch East India Company (VOC) led to lively trade. The stock issuance of the VOC created the first stock exchange in the world.

At the beginning of the 19th century, the stock exchanges as we know them today emerged, with fixed rules and structures, for example, the London Stock Exchange and the Euronext. The latter is linked to the AEX, AMX, and AScX indices.

Exchange mergers

As more exchanges were founded in Europe, the idea arose to merge them to ensure lower costs and easier access. For example, in 2000, the stock exchanges of Paris, Amsterdam, and Brussels merged to form Euronext. Seven years later, in 2007, the New York Stock Exchange took over Euronext to become the largest exchange in the world. However, in 2014, Euronext became an independent company again following a spin-off from Intercontinental Exchange (ICE).

What is the purpose of a stock exchange?

A stock exchange has various purposes and plays an important role in the economy. These are:

Attracting capital: Companies issue stocks to grow and invest. Governments use bonds to borrow money for expenses.
Creating liquidity: As an investor, you can easily buy and sell stocks and bonds, which is important for a properly functioning market.
Price determination: Fair, transparent prices for securities emerge through supply and demand.
Economic insight: The performance of the exchange often reflects confidence in the economy.
Investment opportunities: You can grow your wealth by investing in companies or capitalising on price movements via the exchange.

Advantages of a stock exchange

A stock exchange offers various advantages for investors. An exchange:

is publicly accessible where you can buy and sell investments, which ensures liquidity;
offers useful information and data to make investment decisions simpler;
ensures you can diversify your portfolio to spread risks.

Disadvantages of a stock exchange

Although investing on the stock exchange offers many opportunities, there are also risks you must consider. For example:

exchange prices can rise and fall sharply (volatility), meaning your investment can fluctuate in value;
fear or enthusiasm can lead to ill-considered decisions and losses;
trading on the stock exchange is not free; there are various costs that reduce your return;
there is always a chance that companies perform poorly or go bankrupt, which can negatively influence your return.

Stock market crash

Although stock prices on an exchange can rise, they can also fall. A stock market crash is a sudden, sharp drop in stock prices. A well-known crash, for example, is the 1929 stock market crash that ushered in the Great Depression. Another is the dot-com bubble around 2000, during which tech companies plummeted en masse. And the most recent is the 2008 financial crisis, which caused markets worldwide to collapse and brought banks into trouble.

From physical to digital exchange

In the past, the trading floor was a busy market: traders shouted orders and exchanged paper contracts. With the rise of technology, this trading moved to digital platforms. This digitalisation makes investing more accessible than ever: you no longer have to be physically present and can invest anywhere in the world.

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Investing involves risks. You can lose your investment.

All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.