After months of the two leaders threatening each other with nuclear weapons, North Korean leader Kim Jong Un said he wanted to meet with President Donald Trump — and Trump accepted.
If a meeting happens, it would be the first time a sitting US president had a face-to-face with the head of the North Korean regime. However, there’s of course still a chance that Trump and Kim don’t meet, or that they fail to reach an agreement even if they do.
Still, it’s quite the turnaround. Earlier this year, the US and North Korea were in the middle of a heated war of words. Trump tweeted on January 2 that he has a “Nuclear Button” on his desk that is “much bigger & more powerful” than North Korea’s — even though that button doesn’t exist. Trump’s tweet was in response to Kim’s New Year’s Day speech in which he said the US should know “a nuclear button is always on the desk of my office, and this is just a reality, not a threat.”
Buttons or no buttons, talks or no talks, the North Korean threat is real. Pyongyang has an intercontinental ballistic missile that could potentially hit all of the United States, including major cities like Chicago, New York, and Washington, DC. And the US military believes North Korea has the capability to “miniaturize” a nuclear weapon to fit on a missile. (It’s unclear, though, if Pyongyang is capable of mounting the bomb atop a missile and hitting the US with it.)
So the stakes for a possible Trump-Kim summit are quite high. But wait: Why is all of this happening? Why are we talking about historic negotiations to avoid a possible war with a tiny, desperately poor country on the other side of the world? It’s a long, complicated story that goes back decades — all the way to the Korean War in the early 1950s. It’s a story of diplomatic failures, madcap dictators, and tricky geopolitical maneuvering.
So for those of you who are confused, don’t sweat it — we’ve got you covered. Here are answers to some of the most basic questions about North Korea that will help you get up to speed on where we are in the conflict, how we got here, and where we’re likely headed.
1) What is North Korea?
North Korea, known officially as the Democratic People’s Republic of Korea (DPRK), is a small country sandwiched between China and South Korea in Northeast Asia. It is home to an estimated 25 million people, nearly 3 million of whom live in the capital city of Pyongyang.
Since 1948, it has been run by the Kim family. The first leader was Kim Jong Un’s grandfather, Kim Il Sung, who was in power from 1948 to 1994. He was treated like a god in both life and death. He is still known today as the “Great Leader” and the “Eternal President,” and monuments glorifying his reign are everywhere in the country.
Kim Il Sung’s cult of personality really began to take root in 1950, when he led the Soviet-backed invasion of South Korea, kicking off the Korean War. The United States intervened in the war on behalf of South Korea, and China later intervened on behalf of the communist North. It was a bloody war that ultimately killed some 5 million soldiers and civilians.
At the war’s end in 1953, the two countries became separated by a demilitarized zone, or DMZ, and remain so to this day. Technically, both sides are still at war, since an armistice (truce) was signed, not a peace treaty.
After the deal was signed, South Korea — with heavy US financial and security support — began to slowly transform itself into what is now one of the world’s wealthiest, best-educated, and most technologically advanced societies.
The North also briefly flourished because of support from the Soviet Union and China, but those good times didn’t last. Mismanagement, crippling debt, and a series of devastating droughts and floods demolished the North Korean economy and set off what would eventually become lingering food shortages in the country.
At the same time, the Soviet Union was suffering its own economic troubles, causing its leaders to pull back on aid to North Korea. When the Soviet Union finally collapsed in the early 1990s, the North Korean economy went into a dramatic downward spiral, culminating in a horrendous famine that killed between 600,000 and 1 million people.
Yet through all of this, Kim Il Sung cultivated a powerful cult of personality. North Koreans were inundated with propaganda branding Kim as the country’s benevolent father figure who was transforming the country into a glorious socialist utopia through his unique brand of ideology, known as “juche.” Translated as “self-reliance,” juche stresses total independence in all facets of national life, from foreign policy to economics to national defense.
When Kim died at the age of 82, the Korean Central News Agency, the country’s official news organization, published a glowing seven-page announcement that said "he turned our country, where age-old backwardness and poverty had prevailed, into a powerful Socialist country, independent, self-supporting and self-reliant.” He was, as the news agency concluded, the “sun of the nation.”
Since Kim’s death in 1994, his son and grandson, Kim Jong Il and Kim Jong Un, respectively, have carried on his legacy, aiming to run the country exactly like he did. They purposefully demonstrate in their own propaganda how closely they hew to Kim Il Sung’s style of governance. Kim Jong Un even goes out of his way to look as much like his grandfather as he possibly can.
Despite some modest reforms to the economy under the two younger Kims, the country is still far, far behind the rest of the world. The CIA ranks North Korea as the 215th-poorest country out of the 230 it tracks, and its people live on about $1,700 a year.
North Korea is almost solely reliant on China as a trading partner, with most of its money coming from the millions of tons of coal it exports to China every year. It also sends iron ore, seafood, and clothing to the Chinese. This is why the news that China had suspended its coal imports from North Korea back in February was such a big deal, even though China’s overall trade with North Korea has increased.
2) Is life for the average North Korean as bad as they say?
Yeah, it is.
As Human Rights Watch notes in gruesome detail:
North Korea remains one of the most repressive authoritarian states in the world. …Kim Jong-un continued to generate fearful obedience by using public executions, arbitrary detention, and forced labor; tightening travel restrictions to prevent North Koreans from escaping and seeking refuge overseas; and systematically persecuting those with religious contacts inside and outside the country…
[G]ross human rights violations committed by the government included murder, enslavement, torture, imprisonment, rape, forced abortion, and other sexual violence, and constituted crimes against humanity.
Nothing exemplifies these violations like the gulags, or forced labor camps, run by the state. Usually, detentions there end in death — and not just for the imprisoned person. North Korea abides by the “three generations of punishment” rule. Basically, if the government thinks you committed a crime, you, your children, and your grandchildren have to suffer the consequences too. A 2017 report by the International Bar Association War Crimes Committee noted that some of the prisons are “as terrible [as] Nazi camps.”
Some North Koreans still find ways to live dignified and relatable lives despite the horrid conditions. In fact, in many ways, life in North Korea can be normal. Subway trains fill with people during rush hour in the capital city, Pyongyang. The city also now suffers from traffic jams, as more people have cars and want to get around on their own. Fashionable Western clothes are available in North Korean stores, and some North Koreans are even getting plastic surgery, despite the procedure’s illegality.
North Koreans also enjoy surfing the country’s intranet, but their choices are very limited with fewer than 30 sites on offer. There, citizens can find a selection of North Korean recipes and films. Of course, there is also a big section that allows Kim Jong Un to show off what he is doing throughout the day.
The few superrich North Koreans — who usually work in the government, the military, or state-run businesses — aren’t too dissimilar from superrich people anywhere else. They lead fairly cosmopolitan lives, frequenting an elite area of the capital nicknamed “Pyonghattan.” They wear designer clothes, eat at fancy restaurants, and go on vacations.
But of course, that is not the norm. Out in the rural areas, “life is little more than a daily struggle to find enough food to stay alive,” Alf Evans, a British aid worker who spent time in rural North Korea in 2013, told the Telegraph. “Every scrap of earth that can be used to grow something is being used,” he said.
3) Why is the US-North Korea relationship so fraught?
North Korea and the US have been at odds ever since the US backed South Korea in the Korean War. Today, the US has 28,500 US troops stationed in South Korea. That country is also America’s sixth-largest trading partner (about $112.2 billion total in two-way trade during 2016), underscored by the Korea-US Free Trade Agreement that went into effect on March 15, 2012 (something Trump may to “terminate”).
For these reasons, North Korea is not a fan of the United States. North Korean propaganda portrays America as an evil imperialist aggressor hell-bent on subjugating the Korean people. There is an entire museum dedicated to alleged American atrocities during the Korean War.
America isn’t exactly thrilled with North Korea either. There are many reasons why, but the main one is that North Korea won’t stop developing its nuclear and ballistic missile capabilities.
For years, North Korea has tried to develop a nuclear weapon that it can put on a missile and hit its enemies. Most experts believe the country wants nukes as a deterrent so that no foreign country (like, say, the United States) would dare attempt to remove the Kim regime from power.
While some think Kim Jong Un is an irrational, “crazy fat kid” — as Senate Armed Services Committee Chair John McCain labeled the North Korean leader in 2017 — experts see his actions to ensure the survival of his family’s rule as rational.
The theory is that the Kims have seen what happened to leaders who don’t have nuclear weapons. Iraq’s Saddam Hussein persuaded much of the world that he had restarted his country’s nuclear weapons program; he hadn’t, but the boasts helped spark the 2003 invasion that drove him from power. In Libya, Muammar Qaddafi gave up his program to build closer ties to the West, but was eventually ousted from power and killed by a mob.
The Kim family wants to survive, and having a credible nuclear weapons program is one way to ensure that it does.
North Korea has accelerated its nuclear program to the point where it can now produce a new bomb every “six or seven weeks.” And it now has an intercontinental ballistic missile that is theoretically capable of hitting every part of the United States. It’s still unclear, though, if North Korea can reliably place a nuclear weapon atop the missile and have it survive reentry into the atmosphere and detonate at its target.
4) How come China hasn't dealt with North Korea yet?
Trump has repeatedly pushed the idea that China, because of its economic influence, has the ability to rein in North Korea if it wants to. Specifically, the US wants China to cut off oil shipments to North Korea and either sharply limit or entirely halt broader trade with the country. However, after Chinese President Xi Jinping spent ten minutesexplaining the complexity of the issueto Trump during a meeting in April, Trump said he “realized it’s not so easy.”
So what are the things that make it “not so easy” for China to control North Korea?
First, China uses North Korea as a buffer. If the Koreas were to unify, which remains an extremely thin possibility right now, then for at least some period, American troops would be stationed in a country that borders China. For Beijing, that’s a no-no.
Second, should the Kim regime fall, the whole country could descend into chaos. Having that kind of instability, with millions of refugees flocking to the border, would not make the Chinese government happy. After all, China prides itself on stability in all its forms.
Finally, having America, Japan, and South Korea worried about North Korea takes the focus off China. China has many objectives in the region, and having its adversaries’ heads turned as it makes moves in the South China Sea and elsewhere is helpful to its cause.
All of these are reasons why China chooses not to be too hard on the Kim regime. China’s leaders may not like the Kim regime or want it to keep developing nuclear weapons, but they prefer that to the alternative scenario of a failed state on their Southern border or, perhaps even worse, an American-controlled state on their Southern border.
Even if China did more, of course, there’s no guarantee that North Korea — a proudly nationalist, nuclear-armed nation — would listen.
5) Is there any way to solve this?
The best outcome would be for North Korea to just decide to give up its nuclear weapons program. But that’s probably never going to happen. On the other side, the US could just accept that North Korea is going to have nuclear weapons capable of hitting the US homeland. That probably won’t happen either.
So what to do?
There are no easy answers, and this situation has confounded presidents and skilled national security officials from both parties. The Trump administration’s current approach, according to a joint statement issued in late April 2017 by Secretary of State Rex Tillerson, Secretary of Defense James Mattis, and Director of National Intelligence Dan Coats, is “to pressure North Korea into dismantling its nuclear, ballistic missile, and proliferation programs by tightening economic sanctions and pursuing diplomatic measures with our Allies and regional partners.”
In a 2017 interview with NPR, Tillerson put it more bluntly, stating that the goal is “a denuclearized North Korea” by way of a negotiated agreement.
But here’s the thing: We’ve tried this before, and it hasn’t worked yet. This is essentially the same policy the Obama administration pursued for the past eight years, to no avail.
Indeed, America and others have been trying to come to some sort of negotiated agreement with North Korea since 1985. And we’ve gotten really close twice. In 1994, the US and North Korea signed the Agreed Framework, in which the North agreed to freeze its plutonium weapons program in exchange for aid. However, the agreement collapsed in 2002, and by January 2003 the North had resumed its nuclear program.
Then in August 2003, the international community launched the so-called “Six Party Talks,” which were designed to get North Korea to halt its nuclear program through negotiations with five other countries: China, the United States, South Korea, Japan, and Russia.
In September 2005, it looked like the talks might work — North Korea formally agreed to abandon “all nuclear weapons and existing nuclear programs” in exchange for energy assistance from the other countries. But in 2009, amid disagreements over technical details related to verification, North Korea walked out on the talks. It says it will never return to the talks and maintains that it is no longer bound by their agreements. And it has been ramping up its nuclear and ballistic missile programs ever since.
The hope is that the administration’s “maximum pressure and engagement” strategy will lead to a diplomatic solution. Perhaps the Trump-Kim meeting might lead to a settled, peaceful outcome.
But if it doesn’t — and the Trump administration still refuses to allow North Korea to have a nuclear weapon that can hit the US mainland — then the only other option that seems to be on the table is a military strike targeting the North’s nuclear facilities. In other words, war.
6) What kind of relationships do other countries have with North Korea?
North Korea doesn’t have many friends.
It has China and, to a lesser degree, Russia, both of which oppose unilateral American military strikes on sovereign countries. The two countries believe that any US move would destabilize the region and harm their own interests. North Korea borders China and Russia, and any crisis on the peninsula would add extra strain to those borders.
(Fun fact: Did you know that if you want to drive from Finland to North Korea, you could drive only through one country? Yeah, Russia is that large.)
On its own, Russia also helps North Korea with its economic woes. Russian Railways is in discussion with the government in Pyongyang to expand the rail connections between the two countries. Moscow also invests heavily in North Korea’s energy sector and gives Kim’s regime hard currency, which it needs to purchase foreign goods. There are also around 10,000 North Koreans in Russia as part of a guest worker program providing cheap labor to Russia.
But North Korea’s cordial relations with other countries basically stop there. It understandably has a bad relationship with South Korea. It’s also hostile toward Japan, which Pyongyang has threatened to nuke many times. The most recent animosity stems from Japan’s harsh colonial rule of Korea from 1910 to 1945.
“Japan pushed Koreans to assimilate, requiring them to speak Japanese, take Japanese names, and worship at Shinto shrines,” writes Robert S. Boynton in the New Yorker. “Men were forced to labor in Japanese factories and mines, and some women were dragooned into sexual slavery.” The period of Japanese colonialism understandably left many Koreans with a deep animosity toward Japan, and the Kim family has continued to perpetuate this hostility in its official propaganda.
In addition, Japan, like South Korea, has been backed by the United States since the end of World War II, where America wanted to make its relationship with Tokyo a centerpiece of its postwar strategy in Asia.
Essentially, North Korea is alone in the world, with very few exceptions. But so far, it doesn’t seem to care all that much — at least, not enough to change its ways.
7) This is starting to get pretty bleak. Can we pause for a musical break?
Sure thing, especially since you made it this far. Here’s your North Korean jam, “Footsteps”:
Catchy, right? By the way, the version here has subtitles — you’re welcome — but it’s worth your time to watch a North Korean chorus sing it live with an orchestra at a big national concert.
There’s no doubt this song is propagandistic. It’s not a complicated song to understand: The Kim family’s message is “stepping with vigorous energy throughout this land.” In other words, the Stalinist ideology championed by the Kims in the 1950s is now the operating system of the whole country and may spread further and further.
North Korea, it’s fair to say, is a world-class innovator when it comes to propaganda. This country continues to roll out new messages and slogans, including 300 to mark the 70th anniversary of its founding in 2015. Here’s a shortened list the BBC provided:
- "Let us turn the whole country into a socialist fairyland by the joint operation of the army and people!"
- "Serve the country and people! Aid the people! Let the wives of officers become dependable assistants to their husbands!"
- "Let this socialist country resound with Song of Big Fish Haul and be permeated with the fragrant smell of fish and other seafoods!"
- "Scientists and technicians, stand in the vanguard of the struggle to build a thriving country that is developing, civilizing and advancing at a fast pace! Build 'gold mountains' and 'treasure mountains' with brilliant scientific and technological achievements!"
- "More stylish school uniforms and quality school things for our dear children!"
- "Let us raise the status of our country to that of a sports power at an earliest date possible! Play sports games in an offensive way, the way the anti-Japanese guerrillas did!"
A lot of North Korean propaganda comes in musical form, as we’ve seen. It’s a tool the state uses and blasts over the loudspeakers throughout the day, including the song “We are the Happiest in the World,” which I’m going to guess is untrue.
But as you can see, a lot of these slogans are about the Kim family, the improvement of mundane things like school uniforms, and the desire for scientific improvement. They are meant to cover nearly every aspect of North Korean life. But …
8) How much do the North Korean people believe the propaganda?
Given how little access outside journalists and academics have to North Korea, it’s really hard to know with any certainty how many North Koreans truly believe the regime’s propaganda and how many just pretend to believe it in order to survive. But North Korean defectors estimate that only about 20 to 50 percent of North Koreans today buy what the regime is selling.
This steady loss of support has been going on since the Great Famine of the 1990s that starved around 23 million North Koreans and killed around 10 percent of the population. The country was and remains an agricultural society. The problem is North Korea’s climate is tough: It’s a mountainous region with harsh winters. Plus, the Soviet Union collapsed in 1991, and with it the help it provided North Korean farmers.
As a result, farm yields dwindled, and the government asked its citizens to “eat only two meals a day!” (Yes, with an exclamation mark.) It also didn’t help that in 1995, a big flood took out about 15 percent of North Korea’s arable land. As the food went away, so did a lot of the support for the government’s propaganda.
New technologies have also begun to play a role. As NK News reports:
[A]s new media technologies have emerged over the past decade or so – simultaneous to increasing numbers of defectors leaving North Korea – the effectiveness of the Pyongyang propaganda is increasingly coming into question. A combination of foreign DVDs, USB drives and defector-run radio stations are all slowly chipping away at the propaganda that Pyongyang monopolized for so long.
So while the propaganda is still prominent, there are clear signs that the Kim family’s grip on information is starting to slip. That’s a big development, and one that needs to be watched in the years to come.
9) How big of a threat is North Korea, actually?
We now know that North Korea appears capable, based on tests it has carried out,of firing a long-range missile that could hit all of the United States. And the US military believes North Korea has the capability to “miniaturize” a nuclear weapon and fit it onto that missile, though questions remain about how accurate their targeting is and whether a nuclear bomb would be able to survive reentry into Earth’s atmosphere using their current ICBM design.
Experts are more confident that if North Korea wanted to strike South Korea and Japan with a nuclear weapon, it could very likely do so. And any nuclear strike on those countries would put American troops stationed there directly in harm’s way.
This is partially why the United States has decided to deploy the Terminal High Altitude Area Defense (THAAD) system in South Korea to defend against certain missile strikes and why America is conducting missile interception tests with Japan.
But while the nuclear and missile programs get all the attention, a seriously underappreciated threat comes from North Korea’s arsenal of conventional weapons, including the world’s largest artillery force. And a third danger comes from the country’s elite special operations forces that could magnify the impact of a North Korean strike on South Korea.
South Korea’s capital city, Seoul, is a so-called “megacity” with a whopping 25.6 million residents living in the greater metropolitan area. It also happens to be within direct firing range of thousands of pieces of North Korean artillery already lined up along the border, also known as the demilitarized zone. Around 70 percent of North Korea’s ground forces are within 90 miles of the DMZ, presumably ready to move south at a moment’s notice.
Simulations of a large-scale artillery fight between the North and South produce pretty bleak results. One war game convened by the Atlantic back in 2005 predicted that a North Korean attack would kill 100,000 people in Seoul in the first few days alone. Others put the estimate even higher. A war game mentioned by the National Interest predicted Seoul could “be hit by over half-a-million shells in under an hour.”
My colleague Yochi Dreazen, who reported on what a war with North Korea might look like, came up with this depressing conclusion: “A full-blown war with North Korea wouldn’t be as bad as you think. It would be much, much worse.”
That leads to the most important question of all: What happens next? That, unfortunately, is the question we don’t have an answer for — but we might after Trump and Kim meet.
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Not to be confused with Exchange (organized market).
A stock exchange is an exchange (or bourse)[note 1] where stock brokers and traders can buy and sell shares of stock, bonds, and other securities. Stock exchanges may also provide facilities for issue and redemption of securities and other financial instruments and capital events including the payment of income and dividends. Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers and sellers consummating transactions at a central location such as the floor of the exchange.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there is a central location at least for record keeping, but trade is increasingly less linked to such a physical place, as modern markets use electronic networks, which give them advantages of increased speed and reduced cost of transactions. Trade on an exchange is restricted to brokers who are members of the exchange. In recent years, various other trading venues, such as electronic communication networks, alternative trading systems and "dark pools" have taken much of the trading activity away from traditional stock exchanges.
The initial public offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks (see stock valuation).
There is usually no obligation for stock to be issued via the stock exchange itself, nor must stock be subsequently traded on the exchange. Such trading may be off exchange or over-the-counter. This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global securities market.
The idea of debt dates back to the ancient world, as evidenced for example by ancient Mesopotamian city clay tablets recording interest-bearing loans. There is little consensus among scholars as to when corporate stock was first traded. Some see the key event as the Dutch East India Company's founding in 1602, while others point to earlier developments. Economist Ulrike Malmendier of the University of California at Berkeley argues that a share market existed as far back as ancient Rome. One of Europe's oldest stock exchanges is the Frankfurt Stock Exchange (Frankfurter Wertpapierbörse) established in 1585 in Frankfurt am Main.
In the Roman Republic, which existed for centuries before the Empire was founded, there were societates publicanorum, organizations of contractors or leaseholders who performed temple-building and other services for the government. One such service was the feeding of geese on the Capitoline Hill as a reward to the birds after their honking warned of a Gallic invasion in 390 B.C. Participants in such organizations had partes or shares, a concept mentioned various times by the statesman and orator Cicero. In one speech, Cicero mentions "shares that had a very high price at the time." Such evidence, in Malmendier's view, suggests the instruments were tradable, with fluctuating values based on an organization's success. The societas declined into obscurity in the time of the emperors, as most of their services were taken over by direct agents of the state.
Tradable bonds as a commonly used type of security were a more recent innovation, spearheaded by the Italian city-states of the late medieval and early Renaissance periods.
Establishment of formal stock exchanges
See also: Economic history of the Dutch Republic, Financial history of the Dutch Republic, and Dutch East India Company
While the Italian city-states produced the first transferable government bonds, they did not develop the other ingredient necessary to produce a fully-fledged capital market: corporate shareholders. In the early 1600s the Dutch East India Company (VOC) became the first company in history to issue bonds and shares of stock to the general public. As Edward Stringham (2015) notes, "companies with transferable shares date back to classical Rome, but these were usually not enduring endeavors and no considerable secondary market existed (Neal, 1997, p. 61)." The VOC, formed to build up the spice trade, operated as a colonial ruler in what is now Indonesia and beyond, a purview that included conducting military operations against the wishes of the exploited natives and of competing colonial powers. Control of the company was held tightly by its directors, with ordinary shareholders not having much influence on management or even access to the company's accounting statements.
However, shareholders were rewarded well for their investment. The company paid an average dividend of over 16 percent per year from 1602 to 1650. Financial innovation in Amsterdam took many forms. In 1609 investors led by one Isaac Le Maire formed history's first bear syndicate, but their coordinated trading had only a modest impact in driving down share prices, which tended to remain robust throughout the 17th century. By the 1620s the company was expanding its securities issuance with the first use of corporate bonds.
Joseph de la Vega, also known as Joseph Penso de la Vega and by other variations of his name, was an Amsterdam trader from a Spanish Jewish family and a prolific writer as well as a successful businessman in 17th-century Amsterdam. His 1688 book Confusion of Confusions explained the workings of the city's stock market. It was the earliest book about stock trading and inner workings of a stock market, taking the form of a dialogue between a merchant, a shareholder and a philosopher, the book described a market that was sophisticated but also prone to excesses, and de la Vega offered advice to his readers on such topics as the unpredictability of market shifts and the importance of patience in investment.
In England, King William III sought to modernize the kingdom's finances to pay for its wars, and thus the first government bonds were issued in 1693 and the Bank of England was set up the following year. Soon thereafter, English joint-stock companies began going public.
London's first stockbrokers, however, were barred from the old commercial center known as the Royal Exchange, reportedly because of their rude manners. Instead, the new trade was conducted from coffee houses along Exchange Alley. By 1698 a broker named John Castaing, operating out of Jonathan's Coffee House, was posting regular lists of stock and commodity prices. Those lists mark the beginning of the London Stock Exchange.
One of history's greatest financial bubbles occurred in the next few decades. At the center of it were the South Sea Company, set up in 1711 to conduct English trade with South America, and the Mississippi Company, focused on commerce with France's Louisiana colony and touted by transplanted Scottish financier John Law, who was acting in effect as France's central banker. Investors snapped up shares in both, and whatever else was available. In 1720, at the height of the mania, there was even an offering of "a company for carrying out an undertaking of great advantage, but nobody to know what it is".
By the end of that same year, share prices had started collapsing, as it became clear that expectations of imminent wealth from the Americas were overblown. In London, Parliament passed the Bubble Act, which stated that only royally chartered companies could issue public shares. In Paris, Law was stripped of office and fled the country. Stock trading was more limited and subdued in subsequent decades. Yet the market survived, and by the 1790s shares were being traded in the young United States.
Role of stock exchanges
Stock exchanges have multiple roles in the economy. This may include the following:
Raising capital for businesses
A stock exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public.
Common forms of capital raising
Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit or a loan, there are four common forms of capital raising used by companies and entrepreneurs. Most of these available options might be achieved, directly or indirectly, through a stock exchange.
Capital intensive companies, particularly high tech companies, always need to raise high volumes of capital in their early stages. For this reason, the public market provided by the stock exchanges has been one of the most important funding sources for many capital intensive startups. After the 1990s and early-2000s hi-tech listed companies' boom and bust in the world's major stock exchanges, it has been much more demanding for the high-tech entrepreneur to take his/her company public, unless either the company already has products in the market and is generating sales and earnings, or the company has completed advanced promising clinical trials, earned potentially profitable patents or conducted market research which demonstrated very positive outcomes. This is quite different from the situation of the 1990s to early-2000s period, when a number of companies (particularly Internet boom and biotechnology companies) went public in the most prominent stock exchanges around the world, in the total absence of sales, earnings and any well-documented promising outcome. Anyway, every year a number of companies, including unknown highly speculative and financially unpredictable hi-tech startups, are listed for the first time in all the major stock exchanges – there are even specialized entry markets for these kind of companies or stock indexes tracking their performance (examples include the Alternext, CAC Small, SDAX, TecDAX, or most of the third market good companies).
A number of companies have also raised significant amounts of capital through R&Dlimited partnerships. Tax law changes that were enacted in 1987 in the United States changed the tax deductibility of investments in R&D limited partnerships. In order for a partnership to be of interest to investors today, the cash on cash return must be high enough to entice investors.
A third usual source of capital for startup companies has been venture capital. This source remains largely available today, but the maximum statistical amount that the venture company firms in aggregate will invest in any one company is not limitless (it was approximately $15 million in 2001 for a biotechnology company).
A fourth alternative source of cash for a private company is a corporate partner, usually an established multinational company, which provides capital for the smaller company in return for marketing rights, patent rights, or equity. Corporate partnerships have been used successfully in a large number of cases.
Mobilizing savings for investment
When people draw their savings and invest in shares (through an IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms.
Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase their 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.
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle-class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders.
By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency 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 privately held companies (those companies where shares are not publicly traded, often owned by the company founders, their families and heirs, or otherwise by a small group of investors).
Despite this claim, 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. The dot-com bubble in the late 1990s, and the subprime mortgage crisis in 2007–08, are classical examples of corporate mismanagement. Companies like Pets.com (2000), Enron (2001), One.Tel (2001), Sunbeam (2001), Webvan (2001), Adelphia (2002), MCI WorldCom (2002), Parmalat (2003), American International Group (2008), Bear Stearns (2008), Lehman Brothers (2008), General Motors (2009) and Satyam Computer Services (2009) were among the most widely scrutinized by the media.
To assist in corporate governance many banks and companies worldwide utilize securities identification numbers (USIN) to identify, uniquely, their stocks, bonds and other securities. Adding an ISIN code helps to distinctly identify securities and the ISIN system is used worldwide by funds, companies, and governments.
However, when poor financial, ethical or managerial records are known by the stock investors, the stock and the company tend to lose value. In the stock exchanges, shareholders of underperforming firms are often penalized by significant share price decline, and they tend as well to dismiss incompetent management teams.
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 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 bonds can obviate, in the short term, direct taxation of citizens to finance development—though by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax 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 economic 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.
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 must meet an exchange's requirements to have their stocks and shares listed and traded there, but requirements vary by stock exchange:
- New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), 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.
- 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.
- 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.
- Bombay Stock Exchange:Bombay Stock Exchange (BSE) has requirements for a minimum market capitalization of ₹250 million (US$3.8 million) and minimum public float equivalent to ₹100 million (US$1.5 million).
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 Securities Exchange (1998), Euronext (merged with New York Stock Exchange), NASDAQ (2002), Bursa Malaysia (2004), the New York Stock Exchange (2005), Bolsas y Mercados Españoles, and the São Paulo Stock Exchange (2007). The Shenzhen and Shanghai stock exchanges can be characterized as quasi-state institutions insofar as they were created by government bodies in China and their leading personnel are directly appointed by the China Securities Regulatory Commission. Another example is Tashkent republican stock exchange (Uzbekistan) established in 1994, three years after the collapse of the Soviet Union, mainly state-owned but has a form of a public corporation (joint stock company). According to an Uzbek government decision (March 2012) 25 percent minus one share of Tashkent stock exchange was expected to be sold to Korea Exchange(KRX) in 2014.
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.
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