Financial Markets

FINANCIAL MARKETS, in terms of stock exchanges, are devoted to the buying and selling of financial tools called securities. Merchants first created joint-stock companies during the Middle Ages and the Renaissance to spread the risks of sea voyages and explorations carried out to establish trade with foreign markets. Stock exchanges are as old as the capitalist mode of economic production, and, with the advent of the Industrial Revolution, stocks were used to finance the infrastructures of industrial civilization.

Today the growth of capitalist societies is funded through the trading of the securities offered by companies, governments, and other institutions. Securities include stocks, bonds, futures, and options. Stocks are still the main form of securities traded in stock markets. Stocks are shares of ownership in companies owned by the stockholders.

Stockholders receive portions of the company's profit margin (dividends) and usually benefit by trading company stocks, buying them when they are at a lower price and selling them when they reach a higher price. However, if the company does not make profits, dividends [Page 364]are usually suspended and stocks’ value may decline below the original purchase price. The stockholder may then have to sell at a lower price, losing rather than gaining money.

The fear that volatile stock markets may trigger another economic depression is firmly rooted in our contemporary society.

Global capitalism relies on financial markets to develop. Stocks and other securities traded in financial markets around the world create the necessary surplus capital to create, in turn, the surplus production that is one of the core principles of capitalism. Therefore, drops in financial markets can seriously affect national economies, leading to an increase in the level of poverty.

With the emergence of globalization, financial markets are becoming increasingly interdependent and can easily influence each other. Fluctuations in the American stock market can soon have an impact on European and Asian markets and vice versa. The crises of financial markets are preceded by the creation of a stock market bubble, caused by the development of public enthusiasm for a particular stock into herd behavior. This creates an exaggerated bull market, a type of market where prices of a given stock rise dramatically, making them significantly overvalued.

Noneconomic events can influence stock values and the volume of trading as much as the economic situation. For example, the New York Stock Exchange (NYSE), mostly known by the name of its location, Wall Street, went through cycles of growth and loss since the 1970s, when the scandals of the Richard Nixon presidency and the setbacks of the Vietnam War had a negative impact on the market. As the American status of superpower remained increasingly undisputed through the 1980s and the 1990s.

Yet, in both decades, the Dow Jones suddenly dropped, establishing negative historical records. In 1987, it dropped by 508 points, while 10 years later it slumped by 554 points. After the September 11, 2001, terrorist attacks against the World Trade Center, the stock exchange remained closed for four days. The continued threats of terrorist attacks have led to a general decline in the American financial market since 2001. This state of anxiety has had a negative impact on international markets as well.

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