Trading of Global Securities
Prior to the 2000s, global trading of securities was conducted primarily through major stock exchanges around the world. Today, a large portion of securities trades are conducted privately via "off-exchanges" through electronic private networks. Stock exchanges were originally created in the leading "money-centered" cities of the world, such as London and New York, where institutional and wealthy individual investors were concentrated. Thus, the strength of the local economy and investor interest were two of the most significant factors that drove the need for a stock market in a particular location. However, with private electronic networks now carrying a heavy load of securities trading of bonds and stock, it has become less important to have a local exchange presence. One exception might be China, as these electronic networks do not connect to its Shanghai Stock Exchange because of government restrictions. Therefore, the Chinese government built a connecting network with the Hong Kong Stock Exchange, which is electronically connected to leading global trading centers, in order to permit the trading of Chinese-based public companies via that exchange.
Sophisticated individual investors, as well as institutional investors, also seek to trade in countries that provide strong laws protecting investors’ rights. Thus, global investors are drawn to the capital markets of the United States, Japan, the United Kingdom, and the European Union because of their strong investor protection laws. While developing countries do often have stock exchanges as well, they frequently lack strong investor protection laws. Another factor is the limited trading volume found in developing countries' stock exchanges, forcing them to focus more on domestic companies' capital needs. For large, growing global companies with significant capital funding needs located in these developing regions, the Eurodollar market and U.S. capital markets present the only alternatives to raising large sums via the sale of their bonds or stocks to global investors. In summary, strong local investor protections coupled with highly liquid local exchange markets is the ideal foundation for a successful securities marketplace.
The two largest stock markets in the world are located within a few miles of each other in New York City. They are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (Nasdaq). There are a couple of reasons for this. The first reason is that New York has been a money-centered city for more than 200 years. The second reason is that the Nasdaq focused on entrepreneurial technology companies that were more prevalent in the United States beginning in the 1980s.
In Asia the major stock exchanges are located in Japan, China, India, South Korea, and Taiwan. The major European stock exchanges are located in England, Italy, Germany, Switzerland, Spain, Ireland, and France. Other major global stock exchanges are located in Australia, South Africa, and Brazil.
Most global stock exchanges trade in foreign securities. The NYSE and the Nasdaq, for example, collectively trade many non-U.S. foreign stocks; such trades are allowed if the shares are registered with the U.S. Securities and Exchange Commission (SEC). Some firms choose to tap into overseas securities markets in addition to their domestic financial markets to gain access to new sources of capital for the company and to help facilitate the financing of overseas assets. More importantly, the low cost of raising debt, for example, has attracted U.S. businesses to Japan over the last twenty years due to lower interest rates. Some countries also have investors who are more likely to buy bonds rather than stocks because of conservative investment practices and because there are significant pension systems that limit investing aggressively for long-term retirement needs. Companies in such countries often seek to be traded on foreign exchanges where consumers are more likely to purchase stocks.
Major Global Securities Exchanges
|NORTH AMERICAN SECURITIES EXCHANGES||NATION/TERRITORY||MARKETPLACE(S)|
|New York Stock Exchange (NYSE)||United States||New York|
|National Association of Securities Dealers Automated Quotations (Nasdaq)||United States||New York|
|ASIAN SECURITIES EXCHANGES||NATION/TERRITORY||MARKETPLACE(S)|
|Japan Exchange Group||Japan||Tokyo|
|Hong Kong Stock Exchange||China||Hong Kong|
|Shanghai Stock Exchange||China||Shanghai|
|Shenzhen Stock Exchange||China||Shenzhen|
|Bombay Stock Exchange||India||Mumbai|
|National Stock Exchange of India||India||Mumbai|
|Korea Exchange||South Korea||Seoul|
|Taiwan Stock Exchange||Taiwan||Taipei|
|EUROPEAN SECURITIES EXCHANGES||NATION/TERRITORY||MARKETPLACE(S)|
|London Stock Exchange Group||United Kingdom
|SIX Swiss Exchange||Switzerland||Zurich|
|Nasdaq Nordic||Armenia, Nordic and Baltic countries||Stockholm|
|BME Spanish Exchanges||Spain||Madrid|
|OTHER GLOBAL MAJOR SECURITIES EXCHANGES||NATION/TERRITORY||MARKETPLACE(S)|
|Australian Securities Exchange||Australia||Sydney|
|JSE Limited||South Africa||Johannesburg|
How Securities Markets Impact the Economy
Changes in the valuation of stocks and bonds in securities markets can profoundly affect the economy of the nation in which the securities are traded, as well as global economic conditions. This is because a healthy economy depends in part on consumer and business confidence in prevailing and future economic conditions. For example, it was the U.S. stock market crash in 1929 that triggered the Great Depression, the greatest economic collapse in the history of the modern industrialized world. The Great Depression started in late 1929 and continued throughout the 1930s.
The collapse of the securities markets in the United States and the triggering of the Great Depression had a significant economic impact on the rest of the country. Unemployment soared to record highs as many companies went out of business. People that had assets began to hoard them, not trusting banks to hold cash and not investing in stocks or bonds. The cyclical negative impact led to food and resource shortages, reduced tax revenues for the government to operate with, and overall fiscal decline. Negative news and events in securities markets can have a cumulative impact in that investors become less confident about future financial security, so they are less willing to invest and demand greater returns for any investments they make. This overall siphoning of money out of the economy can have a repetitive negative impact in which negative security impacts leads to bad news, which leads to further securities market declines.
The opposite can also happen, in which a healthy economy leads to higher levels of consumer confidence and greater investment in corporate securities. Corporations use this new money to expand their offerings and raise pay for their current workforce. Their employees, feeling more secure at work, spend more and strengthen the consumer marketplace, which encourages other companies to expand and increase hiring. Overall, what people believe about their short- and long-term economic prospects heavily influences what they think about the securities markets and their willingness to invest at any given time.
Capital Asset Pricing Model
The capital asset pricing model (CAPM) is based on the economic theory that postulates that the expected return of a securities asset depends on its level of systematic risk. The model provides a method to measure the amount of risk for a given individual security traded in the marketplace. Essentially the CAPM is used in finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. Thus, an investor can use the CAPM to determine the expected return on a security relative to the risk-free return plus the risk premium of that security. The risk-free investment rate is what a long-term government bond will pay in that securities market.
In building individual investment portfolios, investors can use the CAPM to predict investment risk and price volatility in any given security. Price volatility is risk related to the size of changes in a security's value. This ensures that the security portfolio created is commensurate with the level of risk the investor wants to take.The CAPM formula calculates the return an investor can expect to receive from an investment in a corporate security in comparison to the risk-free return that could be received from a safe asset class, such as a government bond. The formula is made up of the return, the risk-free rate, the beta, and the risk premium. The return is what the investor expects the asset to generate. The risk-free rate on interest is the rate than can be earned in a market by investing in a safe asset class, like government bonds. The beta () is the sensitivity of the expected asset return in relation to the market return.