How does the stock exchange affect companies?

Stock exchange

Maritime trade boosts the stock exchanges

The Belgian and Dutch cities of Bruges, Antwerp and Amsterdam replaced the Italian cities of Venice, Genoa and Florence as leading trading centers in the late 15th century. Some of their stock exchange-like trading centers had already emerged in the 12th century. However, no company shares were traded there at that time.

That only happened with the rise of the Dutch colonial trading company "Vereenigde Oost-Indische Compagnie" (VOC), which sold the world's first share.

The share was traded in the Netherlands from 1602. The trading business had shifted to the Dutch coast after the Atlantic shipping and the associated trade had gained in importance.

The overseas discoveries and conquests spurred transportation and trade. Above all, currencies (sorts), bills of exchange and debt certificates such as court and royal letters were traded on the stock exchanges. But also bulk goods such as pepper, grain and the various raw materials were sought-after objects of speculation.

The stock market attracts speculators

A distinction is still made today between commodity, currency and stock exchanges. Especially after industrialization in Europe and later in North America as well as the establishment of public banks, the stock exchanges gained immensely in importance from around 1750. Large projects have now become financially feasible thanks to many shareholders. Commodity futures also increased.

Goods were traded that had not yet been produced or mined, for example raw materials or agricultural goods. For example, a fattening farm was able to stock up on grain at a fixed price at an early stage that had not yet been harvested. The fattening operator was thus immune to price fluctuations until the harvest and was able to calculate better.

But speculators were also attracted: They tried to estimate the value of a commodity in advance and influenced their share prices through targeted purchases and sales. Manipulation, embezzlement and the establishment of bogus companies were side effects of the stock market from an early stage.

From the early days of the Dutch stock exchanges, the deception of a company has been handed down that promised its investors the construction of a "perpetual motion machine" - a construction that was to stay in motion forever.

In 1896 the legislature reacted in the German Reich. He passed a stock exchange law that banned futures trading for certain economic segments, such as grain.

Large entrepreneurial projects

Companies can use the stock exchange market to collect money from investors in order to realize large-scale entrepreneurial projects. Brokers buy and sell shares on the stock exchange. The processing (implementation) is carried out by banks and brokers.

A classic example is the construction of railroads in the United States. Individuals hardly had the money to finance a route network, sufficient locomotives and wagons, and train personnel. So they founded a stock corporation (AG).

The donors bought shares in the company, the shares. In owners' meetings (general meetings) they were allowed to participate in decision-making about the company management. That is still the case today - shareholders are entitled to vote. Holders of other securities are not allowed to vote.

The stock exchange is cyclical

Share certificates are constantly traded on the stock exchange. Their prices (courses) fluctuate continuously and depend mainly on the expected profits.

Let's go back to the American railways, for example: if the railroad company's business is good and profits bubble up, the price rises. If, on the other hand, trains are constantly attacked by Indians or tracks are blown up by bandits, it sinks. Because that increases the company's costs.

If a stock exchange upswing takes place within entire industries or in the overall market, it is a so-called "bull market" (French: rise, represented by a bull). The opposite, the fall in security prices, is called "bear market" (French: sink, represented by a bear).

Psychology and the market environment can also move courses. If the overall economic development (economy) is negative or if an entire industry is doing badly, this puts a strain on share prices. Rumors and the mere announcement of company profits or losses are often enough to move the share prices of the respective companies.

Between buying hysteria and sales panic

Sometimes things are turbulent on the stock exchange: in 1999 a blind shopping hysteria broke out on the Neuer Markt, the German technology exchange in Frankfurt am Main. Back then, investors ordered (subscribed) shares in companies whose business they did not even know or understand.

A risky undertaking, as many young companies quickly disappeared from the market. The dot-com bubble burst in 2000.

In times of crisis - for example on "Black Friday" in the USA in 1929 - stocks are again sold in panic, even if the company is solid.

However, prices can also rise because many investors just want to invest money. One example is stock funds, which are stocks of stocks managed by financial professionals in which anyone can buy shares. The managers of such equity funds have the task of investing the money raised by fund buyers wisely.

Anyone who invests in a fund with a lot of money can increase the value of a share enormously. However, prices also fall accordingly if many shareholders "go out of the market" at the same time. For example, when they need money because the bank cancels or cuts their securities loan because the share price has fallen.

Distribution of profits to shareholders

If a company makes a profit, it usually pays out a share of the profits to the shareholders for the past year: the dividend. Companies that are still young often generate little or no profits. You first have to invest in infrastructure (such as buildings and technical equipment) and growth.

If the capital collected on the stock exchange is used up and the company does not receive any new money from any bank, the stock corporation is insolvent. Selling (issuing) new shares on the stock exchange and thus making money is then usually no longer possible. After all, who wants to put money into an ailing company?

If there is no rescue through a takeover, the AG is bankrupt. The share is then worthless. Many young companies have already disappeared from the Neuer Markt list. And the first public company in the world, the VOC, has not existed for a long time either: it went bankrupt in 1799.