STOCK EXCHANGE

also called stock market, or (in continental Europe) bourse organized market for the sale and purchase of securities such as shares, stocks, and bonds. In developed capitalist countries, the stock exchange has important functions: as a ready market for securities, it ensures their liquidity and thus encourages people to channel savings into corporate investment; and, as a pricing mechanism, it allocates capital among firms by determining prices that reflect the true investment value of a company's stock (the present worth of the stream of expected income per share). Trading is done in various ways: it may occur on a continuous auction basis, it may involve brokers buying from and selling to dealers in certain types of stock, or it may be conducted through specialists in a particular stock. Membership requirements of the exchanges of different countries vary mainly with respect to the number of members, the degree of bank participation, and the rigour of the eligibility requirements. They also differ in the degree to which government participates in their management. The London Stock Exchange, for example, functions as an independent institution, free from government legislation. In the United States, stock exchanges, although not subject to direct government participation in their operation, are subject to rather specific legislative regulation. In Europe, it is quite common for the members of the exchanges to be appointed by a government official and to have semigovernmental status.