The Reason For Stock Exchanges

An exchange provides the investor with a medium by which he may convert his funds into securities which he hopes will bring him income, a gain of capital, or both. Without this invested capital America would not enjoy the products of modern industry which we take for granted today.

Although a stock exchange is not in itself a source of new equity capital-of risk funds essential to developing new industries-the flow of new capital soon would slow to a trickle without it. If there were no stock exchange-no market place where people could sell their securities for cash-capital would soon become sluggish and the financing of new ventures, no matter how promising, would be heavily curtailed.

The investment-banking business has built up a highly efficient mechanism for the initial sale of securities issued by a new enterprise. The investment banker buys an entire issue of securities from the new company and it is his job to sell the securities to the investing public, both institutional and individual investors.

As a general rule, after the investment banker has made this primary distribution of securities, the number of investors in the company is still comparatively small. These are the investors willing to put their money into new enterprises which have not yet developed a widespread public appeal. As new securities become seasoned, however, they may qualify for listing. That step makes the securities more attractive to more people and enables the holders, when and if they wish, to liquidate their investment in a market place and to put the proceeds into another enterprise.

How important are the 1,500 companies with stock listed on the NYSE? Some measure of their importance may be got from these figures: these 1,500 companies earn about half of all the net profits after taxes reported by all U. S. companies; they pay their stockholders half of all the dividends disbursed; about 90 per cent of these companies paid cash dividends in the last twelve months and almost three hundred have paid dividends every single quarter for twenty years or more.