The stock exchange (aka stockmarket) is “A physical and electronic market in which government bonds and the securities of companies are traded regularly [1]” In a simplified form, the stock exchange is a type of market place where entrepreneurs meet with investors to try and get finance to start their business.  The entrepreneur gives some of the equity (shares) in the company to the investor who takes on the risk.  The investor is paid dividends for taking on the risk inherent in attempting this business venture.

 

In this way, the entrepreneur gets the capital to start the business they have in mind, and the investor increases their wealth when a business they have invested in thrives and returns the initial investment plus premiums for the uncertainty of success.

 

The concept of risk is at the heart of understanding the activity of the stockmarket, and the behaviour of the people involved.  “Risk deals either with a priori probabilities such as rolling a dice, or statistical probabilities based on relative frequencies such as in life insurance. Because an investment often has an unknown outcome, part of the return will have a risk premium. This was recognised as a necessary inducement to investors as far back as Adam Smith and JS Mill [2]”

 

The concept of risk gives rise to that of insurance against risk. Donald Rutherford describes ‘insurance’ as “A method of sharing risks. Originally it was chiefly concerned with insuring shipping, the riskiest of business ventures in earlier centuries, but the principle was extended to coverall types of risk, including damage to property, personal injury and death. The fairest type of insurance is where the cost to the insured of premiums and the cost to insurers of administration do not exceed the total payout on risks which have occurred.  However, the monopoly power of many insurers permits them to make excessive profits [3]”

 

Lloyd’s of London is a famous UK insurance and reinsurance market.  It serves as a meeting place where multiple financial backers, underwriters, or members (whether individuals, traditionally known as ‘Names’) or corporations, come together to pool and spread risk.  The society of Lloyd’s was incorporated by the Lloyd’s Act 1871. The formation of the Lloyd’s market began in Edward Lloyd’s coffeehouse, 1688, in Tower Street, London.

 

This coffee house was popular to sailors, merchants, and ship owners as Lloyd provided them with reliable shipping news.  The shipping industry community started to frequent the place to discuss insurance deals amongst themselves. This carried on after Lloyd’s death in 1713 until in 1774 when the participating members of the insurance arrangement formed a committee and moved to the Royal Exchange as The Society of Lloyd’s.

 

This is one example of how risk, insurance, investment and trade amalgamated to create a market place where people trade in stocks (securities).  It is a story of how people who have a business proposition (entrepreneurs) meet with people who have finance (investors) and devise deals where risks and profits are shared: the entrepreneurs get the opportunity to realise their business and the investors are rewarded financially for taking on the risk that the business might fail.

 

 

Assignment: Look at this wikipedia article and write a short history of a stock exchange in a particular country.  It needs to be at least 500 words and contain 3 references to where you got your information.

 

This is part of a series of articles and exercises exploring food speculation and its relation to famine:

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[1] page 569, Routledge Dictionary of Economics Third Ediction, Donald Rutherford, Routledge ISBN: 978-0-415-60038-5

[2] Page 183, Economics, The Key Concepts; Donald Rutherford, Routledge Key Guides, ISBN: 978-0-415-40057-2

[3] page 297, Routledge Dictionary of Economics Third Ediction, Donald Rutherford, Routledge ISBN: 978-0-415-60038-5