The Definition The term 'the stock market' is a concept for the mechanism that enables the trading

of company stocks (collective shares), other securities, and derivatives. Bonds are still traditionally traded in an informal, over-the-counter market known as the bond market. Commodities are traded in commodities markets, and derivatives are traded in a variety of markets (but, like bonds, mostly 'over-the-counter'). The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion 'face' or nominal value, 30 times the size of the U.S. economyand 12 times the size of the entire world economy.[1] The major U.S. Banks alone are said to account for well over $200 trillion. It must be noted though that the value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. (Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.) The stocks are listed and traded on stock exchanges which are entities (a corporation or mutual organization) specialized in the business of bringing buyers and sellers of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, the OTCBB, and Pink Sheets. European examples of stock exchanges include the Paris Bourse (now part of Euronext), the London Stock Exchange and the Deutsche Brse. Trading Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges where traders may enter "verbal" bids and offers simultaneously. The other type of exchange is a virtual kind, composed of a network of computers where trades are made electronically via traders at computer terminals. Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for the stock. (Buying or selling at market means you will accept any bid price or ask price for the stock.) When the bid and ask prices match, a sale takes place on a first come first served basis if there are multiple bidders or askers at a given price. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery. The New York Stock Exchange is a physical exchange. This is also referred to as a "listed" exchange (because only stocks listed with the exchange may be traded). Orders enter by way of brokerage firms that are members of the exchange and flow down to floor brokers

who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buy orders and sell orders. Prices are determined using an auction method known as "open outcry": the current bid price is the highest amount any buyer is willing to pay and the current ask price is the lowest price at which someone is willing to sell; if there is a spread, no trade takes place. For a trade to take place, there must be a matching bid and ask price. (If a spread exists, the specialist is supposed to use his own resources of money or stock to close the difference, after some time.) Once a trade has been made, the details are reported on the "tape" and sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is a significant amount of direct human contact in this process, computers do play a huge role in the process, especially for so-called "program trading". The Nasdaq is a virtual (listed) exchange, where all of the trading is done over a computer network. The process is similar to the above, in that the seller provides an asking price and the buyer provides a bidding price. However, buyers and sellers are electronically matched. One or more Nasdaq market makers will always provide a bid and ask price at which they will always purchase or sell 'their' stock.[2]. The Paris Bourse, now part of Euronext is an order-driven, electronic stock exchange. It was automated in the late 1980s. Before, it consisted of an open outcry exchange. Stockbrokers met in the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order matching process was fully automated. From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and Nasdaq and pair buyers and sellers of securities themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant. Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion a year that institutional investors pay in trading commissions. Market participants Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups, and banks). The rise of the institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees (they then went to 'negotiated' fees, but only for large institutions).

However, corporate governance (at least in the West) has been very much adversely affected by the rise of (largely 'absentee') institutional 'owners.' History Historian Fernand Braudel suggests that in Cairo in the 11th century Muslim and Jewish merchants had already set up every form of trade association and had knowledge of every method of credit and payment, disproving the belief that these were invented later by Italians. In 12th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. In late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurse, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Amsterdam. In the middle of the 13th century Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and most developing economies, with the world's biggest markets being in the United States, Canada, China (Hongkong), India, UK, Germany, France and Japan. The Bombay Stock Exchange in India. The Bombay Stock Exchange in India. Importance of stock market Function and purpose The stock market is one of the most important sources for companies to raise money. This allows businesses to go public, or raise additional capital for expansion. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison d'tre of central banks.

Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity. Relation of the stock market to the modern financial system The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via banks' traditional lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 per cent of households' financial wealth, compared to less than 20 per cent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another. The stock market, individual investors, and financial risk Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables). With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtalking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the well-known and long term value oriented stock investor Warren Buffett.[1] Buffett began his career with only 100 U.S. dollars and has over the years built himself a multibillion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st. The behavior of the stock market NASDAQ in Times Square, New York City. NASDAQ in Times Square, New York City. From experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments have been put forward against the notion that financial markets are efficient. According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this largely theoretic academic viewpoint also predicts that little or no trading should take place contrary to fact since prices are already at or near equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent the largestever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search failed to detect any specific or unexpected development that might account for the crash. It also seems to be the case more generally that many price movements are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period confirms this.[2] Moreover, while the EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for large price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact. Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that people are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor's selfconfidence, reducing his (psychological) risk threshold.[3] Another phenomenon also from psychology that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group.

In one paper the authors draw an analogy with gambling.[4] In normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically. The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the recent Nasdaq crash, less than 1 per cent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 crash, the average did not rise above 5%). The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash, so that by summer of 2002, predictions of a DOW average below 5000 were quite common.) Irrational behavior Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself. Therefore, the stock market can be swayed tremendously in either direction by press releases, rumors and mass panic. Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to predict. Stock market index Main article: Stock market index The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization (the total market value of floating capital of the company) weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment. Derivative instruments Main article: Derivative (finance) Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures exchanges (which are distinct from stock exchanges their history traces back to commodities futures exchanges), or traded over-the-counter. As all of these products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock market. Leveraged Strategies Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives may be used to control

large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale. Short selling Main article: Short selling In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The practice of naked shorting is illegal in most (but not all) stock markets. Margin buying Main article: margin buying In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade. (Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not declined in the interim). New issuance Main article: Thomson Financial league tables Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by 333%, from $ 9 billion to $39 billion. Investment strategies Main article: Stock valuation

Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%/year, compounded annually, since World War II). Finally, one may trade based on inside information, which is known as insider trading. One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk control and diversification. History of stock exchanges In 11th century France the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers. Some stories suggest that the origins of the term "bourse" come from the Latin bursa meaning a bag because, in 13th century Bruges, the sign of a purse (or perhaps three purses), hung on the front of the house where merchants met. However, it is more likely that in the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Burse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam. In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351, the Venetian Government outlawed spreading rumors intended to lower the price of government funds. There were people in Pisa, Verona, Genoa and Florence who also began trading in government securities during the 14th century. This was only possible because these were independent city states ruled by a council of influential citizens, not by a duke. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. In 1688, the trading of stocks began on a stock exchange in London. The role of stock exchanges Bombay Stock Exchange Bombay Stock Exchange Frankfurt Stock Exchange Frankfurt Stock Exchange

Hong Kong Stock Exchange Hong Kong Stock Exchange London Stock Exchange London Stock Exchange Madrid Stock Exchange Madrid Stock Exchange Montreal Stock Exchange Montreal Stock Exchange New York Stock Exchange New York Stock Exchange Osaka Securities Exchange Osaka Securities Exchange Philippine Stock Exchange, in Makati City Philippine Stock Exchange, in Makati City So Paulo Stock Exchange So Paulo Stock Exchange Shanghai Stock Exchange Shanghai Stock Exchange Taiwan Stock Exchange Taiwan Stock Exchange Tokyo Stock Exchange Tokyo Stock Exchange Toronto Stock Exchange Toronto Stock Exchange SWX Swiss Exchange SWX Swiss Exchange Stock exchanges have multiple roles in the economy, this may include the following:[1][2] Raising capital for businesses The Stock Exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. Mobilizing savings for investment When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and higher productivity levels. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase its market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Redistribution of wealth Stocks exchanges do not exist to redistribute wealth although casual and professional stock investors through stock price increases (that may result in capital gains for the investor) and dividends get a chance to share in the wealth of profitable businesses.

Corporate governance By having a wide and varied scope of owners, companies generally tend to improve on their management standards and efficiency in order to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privatelyheld companies (those companies where shares are not publicly traded, often owned by the company founders and/or their families and heirs, or otherwise by a small group of investors). However, some well-documented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies (Pets.com (2000), Enron Corporation (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), or Parmalat (2003), are among the most widely scrutinized by the media). Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. Government capital-raising for development projects Governments at various levels may decide to borrow money in order to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such municipal bonds can obviate the need to directly tax the citizens in order to finance development, although by securing such bonds with the full faith and credit of the government instead of with collateral, the result is that the government must tax the citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on market forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.

Stock Exchange Major stock exchanges Twenty Major Stock Exchanges In The World & Their Market Capitalization as of August 2007

Region
North America-Europe Asia Pacific North America Europe Asia Pacific Asia Pacific North America Europe Europe Asia Pacific Europe Europe Asia Pacific Asia Pacific South America Europe Asia Pacific Europe Africa Asia Pacific

stock exchane value trllions of US dollars)

NYSE Euronext $19.6 Tokyo Stock Exchange $4.52 NASDAQ $4.05 (July 2007) London Stock Exchange $3.85 Shanghai Stock Exchange $2.38 Hong Kong Stock Exchange $2.28 Toronto Stock Exchange $1.90 Frankfurt Stock Exchange (Deutsche Brse) $1.89 Madrid Stock Exchange (BME Spanish Exchanges) $1.50 Australian Securities Exchange $1.28 Nordic Stock Exchange Group OMX1 $1.27 Swiss Exchange $1.25 Bombay Stock Exchange $1.11 Korea Exchange $1.10 So Paulo Stock Exchange $1.09 Milan Stock Exchange (Borsa Italiana) $1.06 National Stock Exchange of India $1.05 Moscow Interbank Currency Exchange $0.860 (January 2007) Johannesburg Securities Exchange $0.777 Taiwan Stock Exchange $0.678

Note 1: includes the Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges * Remarks: There are 2 pending major mergers: NASDAQ with OMX; and London Stock Exchange with Milan Stock Exchange The main stock exchanges in the world include: * American Stock Exchange * Australian Stock Exchange * Bolsa Mexicana de Valores * Bombay Stock Exchange * Euronext Amsterdam * Euronext Brussels * Euronext Lisbon * Euronext Paris * Frankfurt Stock Exchange * Helsinki Stock Exchange * Hong Kong Stock Exchange * Istanbul Stock Exchange * JASDAQ * Johannesburg Securities Exchange * Karachi Stock Exchange * Korea Stock Exchange * Kuwait Stock Exchange * London Stock Exchange * Madrid Stock Exchange * Milan Stock Exchange

* Nagoya Stock Exchange * National Stock Exchange of India * NASDAQ * New York Stock Exchange * Osaka Securities Exchange * So Paulo Stock Exchange * Shanghai Stock Exchange * Singapore Exchange * Stockholm Stock Exchange * Taiwan Stock Exchange * Tokyo Stock Exchange * Toronto Stock Exchange * Zurich Stock Exchange Listing requirements Listing requirements are the set of conditions imposed by a given stock exchange upon companies that want to be listed on that exchange. Such conditions sometimes include minimum number of shares outstanding, minimum market capitalization, and minimum annual income. Requirements by stock exchange Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded there, but requirements vary by stock exchange: * London Stock Exchange: The main market of the London Stock Exchange has requirements for a minimum market capitalization (700,000), three years of audited financial statements, minimum public float (25 per cent) and sufficient working capital for at least 12 months from the date of listing. * NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years ([1]). * New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for example, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years ([2]). * Bombay Stock Exchange: Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of Rs.250 Million and minimum public float equivalent to Rs.100 Million([3]). Ownership Stock exchanges originated as mutual organizations, owned by its member stock brokers. There has been a recent trend for stock exchanges to demutualize, where the members sell their shares in an initial public offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock exchange. Examples are Australian Stock Exchange (1998), Euronext (merged with New York Stock Exchange), NASDAQ (2002) and the New York Stock Exchange (2005).

Other types of exchanges In the 19th century, exchanges were opened to trade forward contracts on commodities. Exchange traded forward contracts are called futures contracts. These commodity exchanges later started offering future contracts on other products, such as interest rates and shares, as well as options contracts. They are now generally known as futures exchanges. The future of stock exchanges in the United States The future of stock trading appears to be electronic, as competition is continually growing between the remaining traditional New York Stock Exchange specialist system against the relatively new, all Electronic Communications Networks, or ECNs. ECNs point to their speedy execution of large block trades, while specialist system proponents cite the role of specialists in maintaining orderly markets, especially under extraordinary conditions or for special types of orders. The ECNs contend that an array of special interests profit at the expense of investors in even the most mundane exchange-directed trades. Machine-based systems, they argue, are much more efficient, because they speed up the execution mechanism and eliminate the need to deal with an intermediary. Historically, the 'market' (which, as noted, encompasses the totality of stock trading on all exchanges) has been slow to respond to technological innovation. Conversion to allelectronic trading could erode/eliminate the trading profits of floor specialists and the NYSE's "upstairs traders." William Lupien, founder of the Instinet trading system and the OptiMark system, has been quoted as saying "I'd definitely say the ECNs are winning... Things happen awfully fast once you reach the tipping point. We're now at the tipping point." Congress mandated the establishment of a national market system of multiple exchanges in 1975. Since then, ECNs have been developing rapidly.[citation needed] One example of improved efficiency of ECNs is the prevention of front running, by which manual Wall Street traders use knowledge of a customer's incoming order to place their own orders so as to benefit from the perceived change to market direction that the introduction of a large order will cause. By executing large trades at lightning speed without manual intervention, ECNs make impossible this illegal practice, for which several NYSE floor brokers were investigated and severely fined in recent years.[citation needed] Under the specialist system, when the market sees a large trade in a name, other buyers are immediately able to look to see how big the trader is in the name, and make inferences about why s/he is selling or buying. All traders who are quick enough are able to use that information to anticipate price movements. ECNs have changed ordinary stock transaction processing (like brokerage services before them) into a commodity-type business. ECNs could regulate the fairness of initial public offerings (IPOs), oversee Hambrecht's OpenIPO process, or measure the effectiveness of securities research and use transaction fees to subsidize small- and mid-cap research efforts. Some[attribution needed], however, believe the answer will be some combination of the best of technology and "upstairs trading" in other words, a hybrid model.

Trading 25,000 shares of Lucent stock (recent[when? see talk page] quote: $2.80; recent[when? see talk page] volume: 49,069,700) would be a relatively simple ecommerce transaction; trading 100 shares of Berkshire Hathaway Class A stock (recent quote: $88,710.00; recent volume: 450) may never be. The choice of system should be clear (but always that of the trader), based on the characteristics of the security to be traded. Even with ECNs forming an important part of a national market system, opportunities presumably remain to profit from the spread between the bid and offer price. That is especially true for investment managers that direct huge trading volume, and own a stake in an ECN or specialist firm. For example, in its individual stock-brokerage accounts, "Fidelity Investments runs 29% of its undesignated orders in NYSE-listed stocks, and 37% of its undesignated market orders through the Boston Stock Exchange, where an affiliate controls a specialist post." Fidelity says these arrangements are governed by a separate brokerage "order-flow management" team, which seeks to obtain the best possible execution for customers, and that its execution is highly rated.[citation needed] The "upstairs market" NASDAQ in Times Square, New York City. Recent research by Kumar Venkataraman, finance professor at SMU's Cox School of Business, and Hendrik Bessembinder offers insight and evidence into new possibilities and difficult issues facing stock exchanges. In Does an electronic stock exchange need an upstairs market? from the July, 2003 issue of Journal of Financial Economics, the authors find that a large portion of institutional trading in electronic exchanges is executed away from the centralized book in the informal 'upstairs market', thus presenting new challenges. Despite the efficiencies of computerized markets, virtually every stock market is accompanied by a parallel "upstairs" market, where larger traders employ the services of brokerage firms to locate counterparties and negotiate trade terms. Upstairs markets are based on relationships. Rather than submitting an electronic order to effortlessly attract counterparties, the upstairs brokers seek out counterparties (from traders known to them who might be interested). They then negotiate transactions that might otherwise be executed at an inordinate cost or delay. An electronic trading system lowers the fixed costs of trading for relatively liquid stocks in block sizes not likely to overwhelm the current market. However, it does not allow for the informal exchange of information (?) that is important for certain types of large trades and for illiquid stocks. In electronic markets, traders dont get a sense of who theyre trading with, how much more the other party is trading, etc., and that information can be very important to some traders. Large (institutional) traders therefore seek other trading venues such as the 'upstairs market' to lower the risk of exposing their order positions, to ensure symmetric transfer of information, and to retain some of the give and take of the old open outcry market. Approximately 70% of block-size trade transactions are executed in the upstairs market in Paris. The Paris Bourse provides an excellent illustration of the use of upstairs intermediation markets, because its electronic limit order market closely resembles the downstairs

(electronic) markets envisioned by theorists. The best evidence from the Paris Bourse is that: 1. Upstairs brokers lower the risk of adverse selection by "certifying" block orders as uninformed (i.e., as not having access to nonpublic information). 2. Upstairs brokers are able to tap into pools of hidden or unexpressed liquidity (they frequently 'go looking' for buyers or sellers not currently in the market). 3. Traders strategically choose across the upstairs and downstairs markets to minimize expected execution costs (including slippage, etc.). 4. Trades are more likely to be routed upstairs if they are large or are in stocks with low overall trading activity. The second result is the most novel and arguably the most important. The upstairs broker completes transactions by searching for institutional investors who may be interested in the stock, but who have not as yet formally expressed their trading intentions. It is documented that executions costs of transactions completed by the upstairs broker average only 35% of what they would have paid if completed against limit orders in the centralized electronic exchange, suggesting that trading relationship and the informal exchange of information between upstairs brokers and institutional traders helps lower execution costs. One major challenge facing electronic markets is the lack of a comparable mechanism of certification of traders and information exchange. The Euronext market allows large transactions in some stocks to be executed outside the quotes. Such outside-the-quote transactions are not permitted in United States markets. For eligible stocks in Paris, market participants agree to outside-the-quote execution mainly for more difficult trades and at times when downstairs liquidity is lacking. These likely represent trades that probably could not have been otherwise completed, suggesting that market quality can be enhanced by allowing participants more flexibility to execute blocks at prices outside the quotes. These findings are particularly relevant to U.S. markets because quoted spreads and depths have decreased substantially in the wake of decimalization. The upstairs market in the Paris Bourse completes two-thirds of block trading volume, compared with 20% on the New York Stock Exchange (NYSE). A likely explanation is that the NYSE floor allows large traders to execute customized strategies through a floor broker, while avoiding the risks of order exposure. If orders submitted to electronic markets do not allow block initiators to limit order exposure and trade strategically, then order flow is likely to migrate to alternative trading venues such as the upstairs market. If youre a liquidity trader, you dont want the system to be anonymous. If youre an informed trader you like anonymity because you can hide in the order flow. To compete with broker-intermediated markets, the next generation of electronic trading systems needs to include features that better meet the needs of large traders, particularly the lack of anonymity. To allow large investors to manage order exposure in an electronic exchange, a wider range of order types that include state contingent exposure and execution algorithms need to be made available. The NYSEs recently introduced Conversion and Parity (CAP) orders which are intended to be smart orders for large lots of stocks that are executed gradually through the day, contingent on market conditions, are a step in this direction.

The future role of the specialist The specialist trades in circumstances when others do not or will not, and therefore takes on a risk which warrants compensation. The current debate centers on the model of compensation. The specialist at the Paris Bourse is compensated in cash and with investment banking business. In contrast, the NYSE specialist is compensated in the form of privileged information on order flow. In recent months, several U.S. institutions have alleged that the NYSE trading abuses is an outcome of this compensation structure. The Paris model overcomes this criticism and presents an alternative for the NYSE to consider. Results show, however, that there continues to be a role for the specialist (or, at least, an 'upstairs trader') in electronic markets. Investors value the presence of a specialist because they can get in and out of a stock with greater ease. Stock market index A comparison of three major stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500. All three have the same height at March 2007. Notice the large dotcom spike on the NASDAQ, a result of the large number of tech companies on that index. A comparison of three major stock indices: the NASDAQ Composite, Dow Jones Industrial Average, and S&P 500. All three have the same height at March 2007. Notice the large dotcom spike on the NASDAQ, a result of the large number of tech companies on that index. A stock market index is a listing of stock and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations. Many indices compiled by news or financial services firms are used to benchmark the performance of portfolios such as mutual funds. Contents * 1 Types of indices * 2 Weighting * 3 Critique of Capitalisation-Weighting * 4 Indices and passive investment management * 5 Ethical stock market indices * 6 Environmental stock market indices * 7 Innovations Awards to Stock Indexes * 8 See also * 9 References * 10 External links 1. Types of indices Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market and by proxy, reflects investor sentiment on the state of the economy. The most regularly quoted market indices are broad-base indices comprised of the stocks of large companies listed on a nation's largest stock exchanges, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX, the Japanese Nikkei 225 and the Hong Kong Hang Seng Index. The concept may be extended well beyond an exchange. The Dow Jones Wilshire 5000 Total Stock Market Index, as its name implies, represents the stocks of nearly every publicly traded company in the United States, including all U.S. stocks traded on the New York Stock Exchange (but not ADRs) and most traded on the NASDAQ and American

Stock Exchange. The Europe, Australia, and Far East Index (EAFE), published by Morgan Stanley Capital International, is a listing of large companies in developed economies in the Eastern Hemisphere. Russell Investment Group added to the family of indexes by launching the Russell Global 10000 which covers 80 countries and all stocks with a market capitalization greater than $200 million USD. More specialised indices exist tracking the performance of specific sectors of the market. The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry. Other indices may track companies of a certain size, a certain type of management, or even more specialized criteria one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment. 2. Weighting An index may also be classified according to the method used to determine its price. In a Price-weighted index such as the Dow Jones Industrial Average and the NYSE ARCA Tech 100 Index, the price of each component stock is the only consideration when determining the value of the index. Thus, price movement of even a single security will heavily influence the value of the index even though the dollar shift is less significant in a relatively highly valued issue, and moreover ignoring the relative size of the company as a whole. In contrast, a market-value weighted or capitalization-weighted index such as the Hang Seng Index factors in the size of the company. Thus, a relatively small shift in the price of a large company will heavily influence the value of the index. In a market-share weighted index, price is weighted relative to the number of shares, rather than their total value. Traditionally, capitalization- or share-weighted indices all had a full weighting i.e. all outstanding shares were included. Recently, many of them have changed to a floatadjusted weighting which helps indexing. 3. Critique of Capitalisation-Weighting The use of capitalisation-weighted indices is often justified by the central conclusion of modern portfolio theory that the optimal investment strategy for any investor is to hold the market portfolio, the capitalisation-weighted portfolio of all assets. However, empirical tests conclude that market indices are not efficient.[citation needed] This can be explained by the fact that these indices do not include all assets or by the fact that the theory does not hold. The practical conclusion is that using capitalisation-weighted portfolios is not necessarily the optimal method. As a consequence, capitalisation weighting has been subject to severe criticism (see e.g. Haugen and Baker 1991, Amenc, Goltz, and Le Sourd 2006, or Hsu 2006), pointing out that the mechanics of capitalisation weighting lead to trend-following strategies that provide an inefficient risk-return trade-off. Also, while capitalisation weighting is the standard in equity index construction, different weighting schemes exist. First, while most indices use capitalisation weighting, additional criteria are often taken into account, such as sales/revenue and net income (see the Guide to the Dow Jones Global Titan 50 Index, January 2006). Second, as an answer to the critiques of capitalisation-weighting, equity indices with different weighting schemes have emerged, such as "wealth"-weighted (Morris, 1996), fundamental-weighted (Arnott, Hsu and Moore 2005), diversity-weighted (Fernholz, Garvy, and Hannon 1998) or equal-weighted indices.

4. Indices and passive investment management There has been an accelerating trend in recent decades to create passively managed mutual funds that are based on market indices, known as index funds. Advocates claim that index funds routinely beat a large majority of actively managed mutual funds; one study claimed that over time, the average actively managed fund has returned 1.8% less than the S&P 500 index - a result nearly equal to the average expense ratio of mutual funds (fund expenses are a drag on the funds' return by exactly that ratio). Since index funds attempt to replicate the holdings of an index, they obviate the need for and thus many costs of the research entailed in active management, and have a lower "churn" rate (the turnover of securities which lose fund managers' favor and are sold, with the attendant cost of commissions and capital gains taxes). Indices are also a common basis for a related type of investment, the exchange-traded fund or ETF. Unlike an index fund, which is priced daily, an ETF is priced continuously, is optionable, and can be sold short. 5. Ethical stock market indices A notable specialised index type is those for ethical investing indices that include only those companies satisfying ecological or social criteria, e.g. those of The Calvert Group, KLD, Dow Jones Sustainability Index and Wilderhill Clean Energy Index. Another important trend is strict mechanical criteria for inclusion and exclusion to prevent market manipulation, e.g. in Canada when Nortel was permitted to rise to over 50% of the TSE 300 index value. Ethical indices have a particular interest in mechanical criteria, seeking to avoid accusations of ideological bias in selection, and have pioneered techniques for inclusion and exclusion of stocks based on complex criteria. Another means of mechanical selection is mark-to-future methods that exploit scenarios produced by multiple analysts weighted according to probability, to determine which stocks have become too risky to hold in the index of concern. Critics of such initiatives argue that many firms satisfy mechanical "ethical criteria", e.g. regarding board composition or hiring practices, but fail to perform ethically with respect to shareholders, e.g. Enron. Indeed, the seeming "seal of approval" of an ethical index may put investors more at ease, enabling scams. One response to these criticisms is that trust in the corporate management, index criteria, fund or index manager, and securities regulator, can never be replaced by mechanical means, so "market transparency" and "disclosure" are the only long-term-effective paths to fair markets. 6. Environmental stock market indices An environmental stock market index aims to provide a quantitative measure of the environmental damage caused by the companies in an index. Indices of this nature face much the same criticism as Ethical indices do that the 'score' given is partially subjective. However, whereas 'ethical' issues (for example, does a company use a sweatshop) are largely subjective and difficult to score, an environmental impact is often quantifiable through scientific methods. So it is broadly possible to assign a 'score' to (say) the damage caused by a tonne of mercury dumped into a local river. It is harder to develop a scoring method that can compare different types of pollutant for example does one hundred tonnes of carbon dioxide emitted to the air cause more or less damage (via climate change) than one tonne of mercury dumped in a river (and poisoning all the fish).

Generally, most environmental economists attempting to create an environmental index would attempt to quantify damage in monetary terms. So one tonne of carbon dioxide might cause $100 worth of damage, whereas one tonne of mercury might cause $50,000 (as it is highly toxic). Companies can therefore be given an 'environmental impact' score, based on the cost they impose on the environment. Quantification of damage in this nature is extremely difficult, as pollutants tend to be market externalities and so have no easily measurable cost by definition. 7. Innovations Awards to Stock Indexes * Most Innovative Benchmark Index o 2004 CBOE S&P 500 BuyWrite Index (BXM) o 2005 FTSE/RAFI Fundamental Index Series o 2006 Standard and Poors Case-Shiller House Prices Indices * Most Innovative ETF o 2004 iShares MSCI EAFE (EFA) and Emerging Markets o 2005 EasyETF GSCI Commodities ETF o 2006 PowerShares DB Commodity Index Tracking Fund (DBC) and PowerShares G10 Currency Harvest Fund (DBV) * Most Innovative Index Derivative o 2004 CBOE Volatility Index (VIX) Futures o 2005 Options on Vanguard VIPERS at the CBOE o 2006 Chicago Board Options Exchange Options on the CBOE Volatility Index (VIX) * Best Index-related Research Paper o 2004 Steven Schoenfeld o 2005 Rob Arnott o 2006 Eugene F. Fama and Kenneth R. French * Lifetime Achievement Award o 2004 Tim Harbert o 2005 William Sharpe and Nathan Most o 2006 Burton G. Malkiel and Ronald J. Ryan Stock trader A stock trader or a stock investor is an individual or firm who buys and sells stocks or bonds (and possibly other financial assets) in the financial markets. Contents * 1 Stock trader versus stock investor * 2 Methodology o 2.1 Information Resources * 3 Expenses, costs and risk * 4 Stock Picking o 4.1 Dart Board Method * 5 Famous stock traders or stock investors * 6 References * 7 See also 1. Stock trader versus stock investor

Charting is the use of graphical and analytical patterns and data to attempt to predict future prices. Charting is the use of graphical and analytical patterns and data to attempt to predict future prices. Individuals or firms trading equity (stock) markets as their principal capacity are called stock traders. Stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. The stock trader is usually a professional. A person can call herself a full or part-time stock trader/investor while maintaining other professions. When a stock trader/investor has clients, and acts as a money manager or adviser with the intention of adding value to his clients finances, he is also called a financial adviser or manager. In this case, the financial manager could be an independent professional or a large bank corporation employee. This may include managers dealing with investment funds, hedge funds, mutual funds, and pension funds, or other professionals in equity investment, fund management, and wealth management. Several different types of stock trading exist including day trading, swing trading, market making, scalping (trading), momentum trading, trading the news, and arbitrage. Stock traders in the trading floor of the New York Stock Exchange. Stock traders in the trading floor of the New York Stock Exchange. On the other hand, stock investors purchase stocks with the intention of holding for an extended period of time, usually several months to years. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company. Many investors believe in the buy and hold strategy, which as the name suggests, implies that investors will hold stocks for the very long term, generally measured in years. This strategy was made popular in the equity bull market of the 1980s and 90s where buy-and-hold investors rode out short-term market declines and continued to hold as the market returned to its previous highs and beyond. However, during the 2001-2003 equity bear market, the buy-and-hold strategy lost some followers as broader market indexes like the NASDAQ saw their values decline by over 60%. 2. Methodology Stock traders/investors usually need a stock broker such as a bank or a brokerage firm to access the stock market. Since the advent of Internet banking, an Internet connection is commonly used to manage positions. Using the Internet, specialized software, and a personal computer, stock traders/investors make use of technical analysis and fundamental analysis to help them in the decision-making process. They may use several information resources.

financial market
In economics a financial market is a mechanism that allows people to easily buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient market hypothesis. Financial markets have evolved significantly over several hundred years and are undergoing constant innovation to improve liquidity.

Both general markets, where many commodities are traded and specialised markets (where only one commodity is traded) exist. Markets work by placing many interested sellers in one "place", thus making them easier to find for prospective buyers. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy that is based, such as a gift economy. In Finance, Financial markets facilitate: -The raising of capital (in the capital markets); -The transfer of risk (in the derivatives markets); and -International trade (in the currency markets). They are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

Contents

1 Definition 2 Types of financial markets 3 Raising capital

o o

3.1 Lenders 3.2 Borrowers

4 Derivative products 5 Currency markets 6 Analysis of financial markets 7 Financial markets in popular culture
o

7.1 Financial markets slang

8 See also 9 Notes 10 References

Definition
The term Financial markets can be a cause of much confusion. Financial markets could mean: 1. organisations that facilitate the trade in financial products. i.e. Stock exchanges facilitate the trade in stocks, bonds and warrants. 2. the coming together of buyers and sellers to trade financial products. i.e. stocks and shares are traded between buyers and sellers in a number of ways including: the use of stock exchanges; directly between buyers and sellers etc. In academia, students of finance will use both meanings but students of economics will only use the second meaning.Financial markets can be domestic or they can be international.

Types of financial markets

The financial markets can be divided into different subtypes: Capital markets which consist of: -Stock markets, which provide financing through the issuance of shares or -Common stock, and enable the subsequent trading thereof. -Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof. -Commodity markets, which facilitate the trading of commodities. -Money markets, which provide short term debt financing and investment. -Derivatives markets, which provide instruments for the management of financial risk. -Futures markets, which provide standardized forward contracts for trading products at some future date; see also forward market. -Insurance markets, which facilitate the redistribution of various risks. -Foreign exchange markets, which facilitate the trading of foreign exchange. The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

Raising capital

To understand financial markets, let us look at what they are used for, i.e. what is their purpose?

Without financial markets, borrowers would have difficulty finding lenders themselves. Intermediaries such as banks help in this process. Banks take deposits from those who have money to save. They can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages. More complex transactions than a simple bank deposit require markets where lenders and their agents can meet borrowers and their agents, and where existing borrowing or lending commitments can be sold on to other parties. A good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its existing shares can be bought or sold. The following table illustrates where financial markets fit in the relationship between lenders and borrowers:

Relationship between lenders and borrowers

Lenders Financial Intermediaries Banks Insurance Companies Pension Funds Mutual Funds Financial Markets Borrowers

Individuals Companies

Interbank Individuals Stock Exchange Companies Money Market Central Government Bond Market Municipalities Foreign Exchange Public Corporations

Lenders
Many individuals are not aware that they are lenders, but almost everybody does lend money in many ways. A person lends money when he or she: -puts money in a savings account at a bank; -contributes to a pension plan; -pays premiums to an insurance company; -invests in government bonds; or -invests in company shares. Companies tend to be borrowers of capital. When companies have surplus cash that is not needed for a short period of time, they may seek to make

money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)

Borrowers
Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation or future business expansion. Governments often find their spending requirements exceed their tax revenues. To make up this difference, they need to borrow. Governments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. In the UK, the total borrowing requirement is often referred to as the public sector borrowing requirement (PSBR). Governments borrow by issuing bonds. In the UK, the government also borrows from individuals by offering bank accounts and Premium Bonds. Government debt seems to be permanent. Indeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments. In the UK, this would cover an authority like Hampshire County Council. Public Corporations typically include nationalised industries. These may include the postal services, railway companies and utility companies. Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets.

Derivative products
During the 1980s and 1990s, a major growth sector in financial markets is the trade in so called derivative products, or derivatives for short. In the financial markets, stock prices, bond prices, currency rates, interest rates and dividends go up and down, creating risk. Derivative products are financial products which are used to control risk or paradoxically exploit risk.

Currency markets
Main article: Foreign exchange market Seemingly, the most obvious buyers and sellers of foreign exchange are importers/exporters. While this may have been true in the distant past, whereby importers/exporters created the initial demand for currency markets, importers and exporters now represent only 1/32 of foreign exchange dealing, according to BIS.[1] The picture of foreign currency transactions today shows: -Banks and Institutions -Speculators -Government spending (for example, military bases abroad) -Importers/Exporters -Tourists

Analysis of financial markets

Much effort has gone into the study of financial markets and how prices vary with time. Charles Dow, one of the founders of Dow Jones & Company and The Wall Street Journal, enunciated a set of ideas on the subject which are now called Dow Theory. This is the basis of the so-called technical analysis method of attempting to predict future changes. One of the tenets of "technical analysis" is that market trends give an indication of the future, at least in the short term. The claims of the technical analysts are disputed by many academics, who claim that the evidence points rather to the random walk hypothesis, which states that the next change is not correlated to the last change. The scale of changes in price over some unit of time is called the volatility. It was discovered by Benot Mandelbrot that changes in prices do not follow a Gaussian distribution, but are rather modeled better by Lvy stable distributions. The scale of change, or volatiliy, depends on the length of the time unit to a power a bit more than 1/2. Large changes up or down are more likely that what one would calculate using a Gaussian distribution with an estimated standard deviation.

Financial markets in popular culture

Gordon Gekko is a famous caricature of a rogue financial markets operator, famous for saying "greed ... is good".

Only negative stories about financial markets tend to make the news. The general perception, for those not involved in the world of financial markets is of a place full of crooks and con artists. Big stories like the Enron scandal serve to enhance this view. Stories that make the headlines involve the incompetent, the lucky and the downright skillful. The Barings scandal is a classic story of incompetence mixed with greed leading to dire consequences. Another story of note is that of Black Wednesday, when sterling came under attack from hedge fund speculators. This led to major problems for the United Kingdom and had a serious impact on its course in Europe. A commonly recurring event is the stock market bubble, whereby market prices rise to dizzying heights in a so called exaggerated bull market. This is not a new phenomenon; indeed the story of Tulip mania in the Netherlands in the 17th century illustrates an early recorded example. Financial markets are merely tools. Like all tools they have both beneficial and harmful uses. Overall, financial markets are used by honest people. Otherwise, people would turn away from them en masse. As in other walks of life, the financial markets have their fair share of rogue elements.

Financial markets slang

-Big swinging dick, a highly successful financial markets trader. The term was made popular in the book Liar's Poker, by Michael Lewis -Geek, a Quant -Grim, an ageless man known for his whistle and tendency to relate current events to financial market[citation needed] -Nerd, a Quant -Quant, a quantitative analyst skilled in the black arts of PhD level (and above) mathematics and statistical methods -Rocket scientist, a financial consultant at the zenith of mathematical and computer programming skill. They are able to invent derivatives of frightening complexity and construct sophisticated pricing models. They generally handle the most advanced computing techniques adopted by the financial markets since the early 1980s. Typically, they are physicists and engineers by training; rocket scientists do not necessarily build rockets for a living. -White Knight, a friendly party in a takeover bid. Used to describe a party that buys the shares of an organisation to help prevent the takeover of that organisation by another party

Option (finance)
For other uses, see Option (disambiguation). Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security. For example, buying a call option provides the right to buy a specified amount of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract.[1] The theoretical value of an option can be determined by a variety of techniques, including the use of sophisticated option valuation models. These models can also predict how the value of the option will change in the face of changing conditions. Hence, the risks associated with trading and owning options can be understood and managed with some degree of precision. Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over-the-counter options are traded between private parties, often well-capitalized institutions, that have negotiated separate trading and clearing arrangements with each other. Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation. Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options.

Contents

1 Contract specifications 2 Types of options

o

2.1 Option styles

3 Valuation models
o o

3.1 Black Scholes 3.2 Binomial option pricing model

o o

3.3 Heston model 3.4 Monte Carlo model

4 Risks
o o

4.1 Example 4.2 Pin risk

5 Trading 6 The basic trades of traded stock options

o o o o

6.1 Long Call 6.2 Short Call 6.3 Long Put 6.4 Short Put

7 Option strategies 8 Historical uses of options 9 See also 10 References 11 Further reading
o o

11.1 Business press and web sites 11.2 Academic literature

12 External links

Contract specifications
Every financial option is a contract between the two counterparties. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:[2] -whether the option holder has the right to buy (a call option) or the right to sell (a put option) -the amount and class of the underlying asset(s) (e.g. 100 shares of XYZ Co. B stock) -the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise

-the expiration date, or expiry, which is the last date the option can be exercised -the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount -the terms by which the option is quoted in the market, usually a multiplier such as 100, to convert the quoted price into actual premium amount

Types of options
The primary types of financial options are: -Exchange traded options (also called "listed options") is a class of exchange traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:[3][4] 1.stock options, 2.commodity options, 3.bond options and other interest rate options 4.index (equity) options, and 5.options on futures contracts Over-the-counter, or OTC options are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a wellcapitalized institution. Option types commonly traded over the counter include: 1.interest rate options 2.currency cross rate options, and 3.options on swaps or swaptions.

Employee stock options are issued by a company to its employees as compensation.

Option styles
Naming conventions are used to help identify properties common to many different types of options. These include:

-European option - an option that may only be exercised on expiration. -American option - an option that may be exercised on any trading day on or before expiration. -Bermudan option - an option that may be exercised only on specified dates on or before expiration. -Barrier option - any option with the general characteristic that the underlying security's price must reach some trigger level before the exercise can occur.

Valuation models
The value of an option can be estimated using a variety of quantitative techniques, although most commonly through the use of option pricing models such as Black-Scholes and the binomial options pricing model.[5] In general, standard option valuation models depend on the following factors: -The current market price of the underlying security, -the strike price of the option, particularly in relation to the current market price of the underlier, -the cost of holding a position in the underlying security, including interest and dividends, -the time to expiration together with any restrictions on when exercise may occur, and -an estimate of the future volatility of the underlying security's price over the life of the option. More advanced models can require additional factors, such as an estimate of how volatility changes over time and for various underlying price levels, or the dynamics of stochastic interest rates. The following are some of the principal valuation techniques used in practice to evaluate option contracts.

Black Scholes
The Black-Scholes model was the first quantitative technique to comprehensively and accurately estimate the price for a variety of simple option contracts. By employing the technique of constructing a risk neutral portfolio that replicates the returns of holding an option, Fischer Black and Myron Scholes produced a closed-form solution for a European option's theoretical price.[6] At the same time, the model generates hedge parameters necessary for effective risk management of option holdings. While the ideas

behind Black-Scholes were ground-breaking and eventually led to a Nobel Prize in Economics for Myron Scholes and Robert Merton, application of the model in actual options trading is clumsy because of the assumptions of continuous (or no) dividend payment, constant volatility, and a constant interest rate. Nevertheless, the Black-Scholes model is still widely used in academic work, and for many financial applications where the model's error is within margin of tolerance.[7]

Binomial option pricing model

Closely following the derivation of Black and Scholes, John Cox, Stephen Ross and Mark Rubinstein developed the original version of the binomial options pricing model.[8] [9] It models the dynamics of the option's theoretical value for discrete time intervals over the option's duration. The model starts with a binomial tree of discrete future possible underlying stock prices. By constructing a riskless portfolio of an option and stock (as in the BlackScholes model) a simple formula can be used to find the option price at each node in the tree. This value can approximate the theoretical value produced by Black Scholes, to the desired degree of precision. However, the binomial model is considered more accurate than Black-Scholes because it is more flexible, e.g. discrete future dividend payments can be modeled correctly at the proper forward time steps, and American options can be modeled as well as European ones. Binomial models are widely used by professional option traders.

Heston model
Since the market crash of 1987, it has been observed that market implied volatility for options of lower strike prices are typically higher than for higher strike prices, suggesting that volatility is stochastic, varying both for time and for the price level of the underlying security. Stochastic volatility models have been developed including one developed by SL Heston.[10] One principal advantage of the Heston model is that it can be solved in closed-form, while other stochastic volatility models require complex numerical models.[10]

Monte Carlo model

For many classes of options, traditional valuation techniques are intractable due to the complexity of the instrument. In these cases, a Monte Carlo approach may often be useful. Rather than attempt to solve the differential equations of motion that describe the option's value in relation to the underlying security's price, a Monte Carlo model determines the value of the option for a set of randomly generated economic scenarios. The resulting sample set yields an expectation value for the option.

Risks

As with all securities, trading options entails the risk of the option's value changing over time. However, unlike traditional securities, the return from holding an option varies non-linearly with the value of the underlier and other factors. Therefore, the risks associated with holding options are more complicated to understand and predict. In general, the change in the value of an option can be derived from Ito's lemma as: where the greeks , , and are the standard hedge parameters calculated from an option valuation model, such as Black-Scholes, and dS, d and dt are unit changes in the underlier price, the underlier volatility and time, respectively. Thus, at any point in time, one can estimate the risk inherent in holding an option by calculating its hedge parameters and then estimating the expected change in the model inputs, dS, d and dt, provided the changes in these values are small. This technique can be used effectively to understand and manage the risks associated with standard options. For instance, by offsetting a holding in an option with the amount of shares in the underlier, a trader can form a delta neutral portfolio that is hedged from loss for small changes in the underlier price. The corresponding price sensitivity formula for this portfolio is:

Example
A call option expiring in 99 days on 100 shares of XYZ stock is struck at $50, with XYZ currently trading at $48. With future realized volatility over the life of the option estimated at 25%, the theoretical value of the option is $1.89. The hedge parameters , , , are (0.439, 0.0631, 9.6, and -0.022), respectively. Assume that on the following day, XYZ stock rises to $48.5 and volatility falls to 23.5%. We can calculate the estimated value of the call option by applying the hedge parmeters to the new model inputs as: Under this scenario, the value of the option increases by $0.132 to $2.022, realizing a profit of $13.20. Note that for a delta neutral portfolio, where by the trader had also sold 44 shares of XYZ stock as a hedge, the net loss under the same scenario would be ($8.75).

Pin risk
A special situation called pin risk can arise when the underlier closes at or very close to the option's strike value on the last day the option is traded prior to expiration. The option writer (seller) may not know with certainty whether or not the option will actually be exercised or be allowed to expire worthless. Therefore, the option writer may end up with a large, unwanted residual

position in the underlier when the markets open on the next trading day after expiration, regardless of their best efforts to avoid such a residual.

Trading
The most common way to trade options is via standardized options contracts that are listed by various futures and options exchanges. [11] By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include: -fulfillment of the contract is backed by the credit of the exchange, which typically has the highest rating (AAA), -counterparties remain anonymous, -enforcement of market regulation to ensure fairness and transparency, and -maintenance of orderly markets, especially during fast trading conditions. Over-the-counter options contracts are not traded on exchanges, but instead between two independent parties. Ordinarily, at least one of the counterparties is a well-capitalized institution. By avoiding an exchange, users of OTC options can narrowly tailor the terms of the option contract to suit individual business requirements. In addition, OTC option transactions generally do not need to be advertised to the market and face little or no regulatory requirements. However, OTC counterparties must establish credit lines with each other, and conform to each others clearing and settlement procedures. With few exceptions,[12] there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire worthless.

The basic trades of traded stock options

These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging.

Long Call
Payoffs and profits from a long call. A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price increases over the exercise price by more than the premium paid, he will profit. If the stock price decreases, he will let

the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can obtain a larger number of options than shares. If the stock rises, he will thus realize a larger gain than if he had purchased shares.

Short Call
Payoffs and profits from a naked short call. A trader who believes that a stock price will decrease can short sell the stock or instead sell a call. Both tactics are generally considered inappropriate for small investors. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited.

Long Put
Payoffs and profits from a long put. A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price. He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price decreases below the exercise price by more than the premium paid, he will profit. If the stock price increases, he will just let the put contract expire worthless and only lose his premium paid.

short Put
Payoffs and profits from a naked short put. A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price increases, the short put position will make a profit in the amount of the premium. If the stock price decreases below the exercise price by more than the amount of the premium, the short will lose money, with the potential loss being up to the full value of the stock.

Option strategies

Payoffs from buying a butterfly spread.

Payoffs from selling a straddle. Combining any of the four basic kinds of option trades (possibly with different exercise prices and maturities) and the two basic kinds of stock trades (long and short) allows a variety of options strategies. Simple strategies usually combine only a few trades, while more complicated strategies can combine several. Strategies are often used to engineer a particular risk profile to movements in the underlying security. For example, buying a butterfly spread (long one X1 call, short two X2 calls, and long one X3 call) allows a trader to profit if the stock price on the expiration date is near the middle exercise price, X2, and does not expose the trader to a large loss. Selling a straddle (selling both a put and a call at the same exercise price) would give a trader a greater profit than a butterfly if the final stock price is near the exercise price, but might result in a large loss.

Historical uses of options

Contracts similar to options are believed to have been used since ancient times. In the real estate market, call options have long been used to assemble large parcels of land from separate owners, e.g. a developer pays for the right to buy several adjacent plots, but is not obligated to buy these plots and might not unless he can buy all the plots in the entire parcel. Film or theatrical producers often buy the right but not the obligation to dramatize a specific book or script. Lines of credit give the potential borrower the right but not the obligation to borrow within a specified time period. Many choices, or embedded options, have traditionally been included in bond contracts. For example many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the

issuer's option. Mortgage borrowers have long had the option to repay the loan early. Privileges were options sold over the counter in nineteenth century America, with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets.

Bank
A bank is a commercial or state institution that provides financial services, including issuing money in various forms, receiving deposits of money, lending money and processing transactions and the creating of credit. A commercial bank accepts deposits from customers and in turn makes loans, even in excess of the deposits; a process known as fractional-reserve banking. Some banks (called Banks of issue) issue banknotes as legal tender. Many banks offer ancillary financial services to make additional profit; for example, most banks also rent safe deposit boxes in their branches. Currently in most jurisdictions commercial banks are regulated and require permission to operate. Operational authority is granted by bank regulatory authorities which provides rights to conduct the most fundamental banking services such as accepting deposits and making loans. A commercial bank is usually defined as an institution that both accepts deposits and makes loans; there are also financial institutions that provide selected banking services without meeting the legal definition of a bank. Banks have influenced economies and politics for centuries. Historically, the primary purpose of a bank was to provide loans to trading companies. Banks provided funds to allow businesses to purchase inventory, and collected those funds back with interest when the goods were sold. For centuries, the banking industry only dealt with businesses, not consumers. Commercial lending today is a very intense activity, with banks carefully analysing the financial condition of their business clients to determine the level of risk in each loan transaction. Banking services have expanded to include services directed at individuals, and risk in these much smaller transactions are pooled. A bank generates a profit from the differential between the level of interest it pays for deposits and other sources of funds, and the level of interest it charges in its lending activities. This difference is referred to as the spread between the cost of funds and the loan interest rate. Historically, profitability from lending activities has been cyclic and dependent on the needs and strengths of loan customers. In recent history, investors have demanded a

more stable revenue stream and banks have therefore placed more emphasis on transaction fees, primarily loan fees but also including service charges on array of deposit activities and ancillary services (international banking, foreign exchange, insurance, investments, wire transfers, etc.). However, lending activities still provide the bulk of a commercial bank's income. The name bank derives from the Italian word banco "desk", used during the Renaissance by Florentines bankers, who used to make their transactions above a desk covered by a green tablecloth.[citation needed]

Contents

1 Services typically offered by banks 2 Types of banks

o o o o

2.1 Types of retail banks 2.2 Types of investment banks 2.3 Both combined 2.4 Other types of banks

2.4.1 Islamic banking

3 Banks in the economy

o o o

3.1 Role in the money supply 3.2 Size of global banking industry 3.3 Bank crisis

4 Challenges within the banking industry 5 Regulation 6 Public perceptions of banks 7 Profitability 8 Bank size information
o

8.1 Top ten banking groups in the world ranked by Shareholder equity ($m) 8.2 Top ten banking groups in the world ranked by assets 8.3 Top ten banks in the world ranked by market capitalisation

o o

o o

8.4 Top ten bank holding companies in the world ranked by profit 8.5 Top ten banking groups in the world ranked by Tier 1 capital

9 History of banking 10 See also

o o o o

10.1 Country specific information 10.2 Types of institution 10.3 Terms and concepts 10.4 Related lists

11 Further reading 12 Notes

Services typically offered by banks

Although the basic type of services offered by a bank depends upon the type of bank and the country, services provided usually include:
-Taking deposits from their customers and issuing current (UK) or checking (US) accounts and savings accounts to individuals and businesses -Extending loans to individuals and businesses -Cashing cheques -Facilitating money transactions such as wire transfers and cashier's checks -Issuing credit cards, ATM cards, and debit cards -Storing valuables, particularly in a safe deposit box -Cashing and distributing bank rolls -Consumer & commercial financial advisory services -Pension & retirement planning

Financial transactions can be performed through many different channels:

-A branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face to face service to its customers -ATM is a computerised telecommunications device that provides a financial institution's customers a method of financial transactions in a public space without the need for a human clerk or bank teller

-Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world -Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone -Online banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society's secure website

Types of banks
Banks' activities can be divided into retail banking, dealing directly with individuals and small businesses; business banking, providing services to mid-market business; corporate banking, directed at large business entities; and investment banking, relating to activities on the financial markets. Most banks are profit-making, private enterprises. However, some are owned by government, or are non-profits. Central banks are non-commercial bodies or government agencies often charged with controlling interest rates and money supply across the whole economy. They generally provide liquidity to the banking system and act as Lender of last resort in event of a crisis.

Types of retail
Commercial bank: the term used for a normal bank to distinguish it from an investment bank. After the Great Depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital market activities. Since the two no longer have to be under separate ownership, some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses.
Community Banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners Community development banks: regulated banks that provide financial services and credit to underserved markets or populations. Postal savings banks: savings banks associated with national postal systems. Private banks: manage the assets of high net worth individuals. Offshore banks: banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks. Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even 18th century. Their original objective was to provide easily accessible savings products to all strata of the population. In some countries, savings banks were created on public initiative, while in others socially committed individuals created foundations to put in place the necessary infrastructure. Nowadays, European savings banks have kept their focus on retail

banking: payments, savings products, credits and insurances for individuals or small and medium-sized enterprises. Apart from this retail focus, they also differ from commercial banks by their broadly decentralised distribution network, providing local and regional outreach and by their socially responsible approach to business and society. Building societies and Landesbanks: conduct retail banking. Ethical banks: banks that prioritize the transparency of all operations and make only what they consider to be socially-responsible investments.

Types of investment banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts, make markets, and advise corporations on capital markets activities such as mergers and acquisitions. Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans. Unlike Venture capital firms, they tend not to invest in new companies.

Both combined
Universal banks, more commonly known as a financial services company, engage in several of these activities. For example, First Bank (a very large bank) is involved in commercial and retail lending, and its subsidiaries in tax-havens offer offshore banking services to customers in other countries. Other large financial institutions are similarly diversified and engage in multiple activities. In Europe and Asia, big banks are very diversified groups that, among other services, also distribute insurance, hence the term bancassurance is the term used to describe the sale of insurance products in a bank. The word is a combination of "banque or bank" and "assurance" signifying that both banking and insurance are provided by the same corporate entity.

Other types of banks

- Islamic banking
Islamic banks adhere to the concepts of Islamic law. Islamic banking revolves around several well established concepts which are based on Islamic canons. Since the concept of interest is forbidden in Islam, all banking activities must avoid interest. Instead of interest, the bank earns profit (mark-up) and fees on financing facilities that it extends to the customers. Also, deposit makers earn a share of the banks profit as opposed to a predetermined interest.[citation needed]

Banks in the economy

Role in the money supply
A bank raises funds by attracting deposits, borrowing money in the interbank market, or issuing financial instruments in the money market or a capital market. The bank then lends out most of these funds to borrowers.

However, it would not be prudent for a bank to lend out all of its balance sheet. It must keep a certain proportion of its funds in reserve so that it can repay depositors who withdraw their deposits. Bank reserves are typically kept in the form of a deposit with a central bank. This behaviour is called fractional-reserve banking and it is a central issue of monetary policy. Note that under Basel I (and the new round of Basel II), banks no longer keep deposits with central banks, but must maintain defined capital ratios.[citation
needed]

Size of global banking industry

Worldwide assets of the largest 1,000 banks grew 15.5% in 2005 to reach a record $60.5 trillion. This follows a 19.3% increase in the previous year. EU banks held the largest share, 50% at the end of 2005, up from 38% a decade earlier. The growth in Europes share was mostly at the expense of Japanese banks whose share more than halved during this period from 33% to 13%. The share of US banks also rose, from 10% to 14%. Most of the remainder was from other Asian and European countries.[citation needed] The US had by far the most banks (7,540 at end-2005) and branches (75,000) in the world. The large number of banks in the US is an indicator of its geography and regulatory structure, resulting in a large number of small to medium sized institutions in its banking system. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy had more than 30,000 branches eachmore than double the 15,000 branches in the UK.[1]

Bank crisis
Banks are susceptible to many forms of risk which have triggered occasional systemic crises. Risks include liquidity risk (the risk that many depositors will request withdrawals beyond available funds), credit risk (the risk that those who owe money to the bank will not repay), and interest rate risk (the risk that the bank will become unprofitable if rising interest rates force it to pay relatively more on its deposits than it receives on its loans), among others. Banking crises have developed many times throughout history when one or more risks materialize for a banking sector as a whole. Prominent examples include the U.S. Savings and Loan crisis in 1980s and early 1990s, the Japanese banking crisis during the 1990s, the bank run that occurred during the Great Depression, and the recent liquidation by the central Bank of Nigeria, where about 25 banks were liquidated.[citation needed]

Challenges within the banking industry

The banking industry is a highly regulated industry with detailed and focused regulators. All banks with FDIC-insured deposits have the FDIC as a regulator; however, for examinations, the Federal Reserve is the primary federal regulator for Fed-member state banks; the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks; and the Office of Thrift Supervision, or OTS, is the primary federal regulator for thrifts. State non-member banks are examined by the state agencies as well as the FDIC. National banks have one primary regulatorthe OCC. Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies, the rules and regulations are constantly changing. In addition to changing regulations, changes in the industry have led to consolidations within the Federal Reserve, FDIC, OTS and OCC. Offices have been closed, supervisory regions have been merged, staff levels have been reduced and budgets have been cut. The remaining regulators face an increased burden with increased workload and more banks per regulator. While banks struggle to keep up with the changes in the regulatory environment, regulators struggle to manage their workload and effectively regulate their banks. The impact of these changes is that banks are receiving less hands-on assessment by the regulators, less time spent with each institution, and the potential for more problems slipping through the cracks, potentially resulting in an overall increase in bank failures across the United States. The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans, rate competition for deposits and the general market changes, industry trends and economic fluctuations. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. A rising interest rate environment may seem to help financial institutions, but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders. The management of the banks asset portfolios also remains a challenge in todays economic environment. Loans are a banks primary asset category and when loan quality becomes suspect, the foundation of a bank is shaken to the core. While always an issue for banks, declining asset quality has become

a big problem for financial institutions. There are several reasons for this, one of which is the lax attitude some banks have adopted because of the years of good times. The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected, resulting in a significant impact on the bank when they are recognized. In addition, banks, like any business, struggle to cut costs and have consequently eliminated certain expenses, such as adequate employee training programs. Banks also face a host of other challenges such as aging ownership groups. Across the country, many banks management teams and board of directors are aging. Banks also face ongoing pressure by shareholders, both public and private, to achieve earnings and growth projections. Regulators place added pressure on banks to manage the various categories of risk. Banking is also an extremely competitive industry. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies, credit unions, check cashing services, credit card companies, etc.

Bank Regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines, aiming to uphold the soundness and integrity of the financial system. The combination of the instability of banks as well as their important facilitating role in the economy led to banking being thoroughly regulated. The amount of capital a bank is required to hold is a function of the amount and quality of its assets. Major banks are subject to the Basel Capital Accord promulgated by the Bank for International Settlements. In addition, banks are usually required to purchase deposit insurance to make sure smaller investors are not wiped out in the event of a bank failure. Another reason banks are thoroughly regulated is that ultimately, no government can allow the banking system to fail. There is almost always a lender of last resortin the event of a liquidity crisis (where short term obligations exceed short term assets) some element of government will step in to lend banks enough money to avoid bankruptcy.

Public perceptions of banks

In United States history, the National Bank was a major political issue during the presidency of Andrew Jackson. Jackson fought against the bank as a symbol of greed and profit-mongering, antithetical to the democratic ideals of the United States.[citation needed]

Currently, many people consider that various banking policies take advantage of customers. In Canada, for example, the New Democratic Party has called for the abolition of user fees for automated teller transactions. [2] Other specific concerns are policies that permit banks to hold deposited funds for several days, to apply withdrawals before deposits or from greatest to least, which is most likely to cause the greatest overdraft, that allow backdating funds transfers and fee assessments, and that authorize electronic funds transfers despite an overdraft.[citation needed] Some have expressed concern about a systemic lack of bank accountability to the public in Canada. [1] In response to the perceived greed and socially-irresponsible all-for-the-profit attitude of banks, in the last few decades a new type of bank called ethical banks have emerged, which only make socially-responsible investments (for instance, no investment in the arms industry) and are transparent in all its operations. In the US, credit unions have also gained popularity as an alternative financial resource for many consumers. Also, in various European countries, cooperative banks are regularly gaining market share in retail banking.[citation
needed]

Profitability
Large banks in the United States are some of the most profitable corporations, especially relative to the small market shares they have. This amount is even higher if one counts the credit divisions of companies like Ford, which are responsible for a large proportion of those companies' profits. [citation needed] In the past 10 years in the United States, banks have taken many measures to ensure that they remain profitable while responding to ever-changing market conditions. First, this includes the Gramm-Leach-Bliley Act, which allows banks again to merge with investment and insurance houses. Merging banking, investment, and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which, the banks hope, will also increase profitability). Second, they have expanded the use of risk-based pricing from business lending to consumer lending, which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. This helps to offset the losses from bad loans, lowers the price of loans to those who have better credit histories, and offers credit products to high risk customers who would otherwise been denied credit. Third, they have sought to increase the methods of payment processing available to the general public and business clients. These products include debit cards, pre-paid cards, smart-cards, and credit cards. These products make it easier for consumers to conveniently make

transactions and smooth their consumption over time (in some countries with under-developed financial systems, it is still common to deal strictly in cash, including carrying suitcases filled with cash to purchase a home). However, with convenience there is also increased risk that consumers will mis-manage their financial resources and accumulate excessive debt. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the cards. The banking industry's main obstacles to increasing profits are existing regulatory burdens, new government regulation, and increasing competition from non-traditional financial institutions.

Bank size information

Top ten banking groups in the world ranked by Shareholder equity ($m)
The 2006 bank atlas was compiled from commercial banks annual reports and financial statements for 2006 and 2005.[3] Figures in U.S. dollars
Rank 1 2 3 4 5 6 7 8 9 Country United States United States United States Citigroup JPMorgan Chase Bank of America Company Shareholder equity ($m) 112537 $mln 107211 $mln 101224 $mln 98226 $mln

United Kingdom HSBC Japan France

Mitsubishi UFJ Financial Group 83281 $mln Credit Agricole Group 65137 $mln 64453 $mln 56610 $min 53640 $min

United Kingdom Royal Bank of Scotland Group France Spain BNP Paribas Santander Central Hispano

10

Japan

Mizuho Financial Group

52243 $min

Top ten banking groups in the world ranked by assets

Figures in U.S. dollars, and as at end-2004[4]
Rank 1 2 3 4 5 6 7 8 9 10 Country Switzerland United States Japan UBS Citigroup Company Assets (US $) 1,533 billion 1,484 billion

Mizuho Financial Group 1,296 billion 1,277 billion 1,243 billion 1,234 billion

United Kingdom HSBC Holdings France France United States Germany Credit Agricole Group BNP Paribas

JPMorgan Chase & Co. 1,157 billion Deutsche Bank 1,144 billion

United Kingdom Royal Bank of Scotland 1,119 billion United States Bank of America 1,110 billion

Top ten banks in the world ranked by market capitalisation

Figures in U.S. dollars, and as at 26 July 2006[5]
Rank 1 Country United States Company Citigroup Market Capitalisation (US $) 275 billion

2 3 4 5 6 7 8 9 10

China United States

ICBC Bank of America

250 billion 230 billion 200 billion 165 billion 145 billion 130 billion (2007) 120 billion 110 billion

United Kingdom HSBC United States Japan Italy United States Switzerland JPMorgan Chase Mitsubishi UFJ Unicredit Wells Fargo UBS

United Kingdom Royal Bank of Scotland 100 billion

As at 16 May 2007, following the January 2007 merger between Banca Intesa and Sanpaolo SPA, Italy's newly formed Intesa Sanpaolo has a market cap of $104.7 billion.

Top ten bank holding companies in the world ranked by profit

Figures in U.S. dollars, and as 2006
Rank 1 2 3 4 Country United States United States Citigroup Bank of America Company Profit (US $) 22.13 billion 21.13 billion 14.55 billion 14.44 billion

United Kingdom HSBC United States JP Morgan Chase

5 6 7 8 9 10

United Kingdom Royal Bank of Scotland Group 12.1 billion Switzerland United States United States United States United States UBS Goldman Sachs Wells Fargo Wachovia Morgan Stanley 9.79 billion 9.34 billion 8.48 billion 7.79 billion 7.45 billion

Top ten banking groups in the world ranked by Tier 1 capital

Figures in U.S. dollars, and as at end-2005[6]
Rank 1 2 3 4 5 6 7 8 9 Country United Kingdom HSBC United States United States United States Japan France Citigroup Bank of America JP Morgan Chase Mitsubishi UFJ Financial Group Credit Agricole Group Company Tier 1 Capital (US $) 79 billion 75 billion 73 billion 72 billion 64 billion 60 billion 48 billion

United Kingdom Royal Bank of Scotland Japan Japan

Sumitomo Mitsui Financial Group 40 billion Mizuho Financial Group 39 billion

10

Spain

Santander Central Hispano

38 billion

History of banking
Main article: History of banking
Florentine banking The Medicis and Pittis among others Banknotes Introduction of paper money Bank of Amsterdam Bank of Sweden The rise of the national banks Bank of England The evolution of modern central banking policies Bank of America The invention of centralized check and payment processing technology Swiss bank United States Banking

Financial markets
Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt

vde

Stock market Stock Preferred stock Common stock Stock exchange Foreign exchange market Retail forex Derivative market Credit derivative Hybrid security Options Futures Forwards Swaps Other Markets Commodity market OTC market Real estate market Spot market