The modern Stock Exchange is a far cry from the cosy little coffee shops in London – or under the trees in New York – where the first capitalists met to do business. Nowadays, all over the world there are stock exchanges linked by telephones, computers, and even satellites in space.      Like any other money market, the stock exchanges are in business to make more money out of existing money, but remember that ALL businesses – especially those that make the things we like to consume – need money to get started.      The more money a stock exchange can make generally means that there is more money to invest in other profit-making enterprises – and so creating wealth for an economy as a whole.      Of course sometimes things can go wrong, but ever since stocks and shares have been bought and sold in order to raise capital, businesses and economies have visibly continued to grow – through the science and technology of the industrial revolution and on and on – into the vast and ever-expanding world trade and profit-making we know today.      THE BROKERS      How a modern stock exchange works is basically the same as the old coffee shops – only much, much bigger and more varied. Until recently, only official members of the stock exchange, and their employees, were allowed to work there.

If an ordinary member of the public wishes to buy or sell shares in a company, he or she must go to a broker – someone who brings buyers and sellers together. Suppose you owned 1,000 shares in a company that was just starting and you bought the shares for £1 each. After a while, the company is successful and you would like to sell some of your shares.      You find a broker who says he knows someone who is willing to pay £2 per share – because the company is profitable and has grown. You could then decide to sell 500 shares to the new buyer for £1,000 and use that money to invest in something else that might grow in the same way.      Not only has your original investment doubled, but the remaining shares you own in the company could also be worth even more if the company continues to grow.      Of course if the company does badly for some reason, then your shares would be worth less and a stockbroker might have a hard time persuading someone else to buy them off you!

The stockbroker charges a fee called a commission – usually a small percentage of the value of the deal – for acting as a go- between. He may charge more if he gives you advice on what to buy or sell.      But just as investors are not allowed to deal directly with each other – in order to prevent secret buying and selling above or below the market price of a share – so too, the brokers are not allowed to deal between themselves, for the same reason. They have to go to other members of the stock exchange called ‘market-makers.’      THE MARKET-MAKERS      Market-makers buy and sell shares and, in doing so, set a price for those shares. They usually give two prices for a company's share. A higher price when they sell and a lower price when they buy. The difference, called the ‘spread,’ is what they keep as payment for their work.

It is a highly skilled and risky business because share prices can go down as well as up and market-makers have to compete with other market-makers and often deal in the same company shares. It's not that easy being ‘something in the city’.      MARKET ‘MOODS’      Economies are so inextricably linked to human nature that it is virtually impossible to predict what will happen next with any certainty. Sometimes a mood of gloom can affect the money markets and prices will begin to fall; at other times a feeling of hope can make prices rise.      These moods are when the ‘bears’ and ‘bulls’ are said to be on the loose. A bear is anyone who thinks share prices are going to fall for one reason or another and sells his or her shares before they do. If share prices in general start falling, then it is called a ‘bear market.’

A bull does just the opposite – he or she believes share prices are going to go up and starts buying before they do. When prices start to rise all across the market as a consequence – it is called a ‘bull market.’      WHAT CAN HAPPEN      Even though many modern stock exchanges no longer operate from just one building with a trading floor – rumours about this and that still fly about.      Since deregulation, brokers, market-makers, and banks have combined as complete businesses themselves and many occupy their own new office blocks, but they are all still in constant touch with competitors and other markets all around the world by telephone, computer, and satellite.      Now gossip can whiz right across the globe in a matter of seconds. But is this progress?      In 1987, the world stock market crash began in New York where people were worried about the American economy. Share prices worldwide were at an all-time high, so some investors figured that they must be able to go down and switched from equity – shares in companies – to fixed-interest stocks and bonds.      The trickle of selling showed up so quickly on the modern computer and telecommunication system that almost immediately, more and more brokers started frantically selling off vast numbers of shares in order to protect their clients.      This made Tokyo, where they were just starting the day's business, also sell huge amounts of shares. Later in London, when they too started business, they did the same thing  and when New York reopened for business - there was panic! Followed by more frenzied selling in Tokyo, and again in London. Very soon, markets across the world – Germany, France, Canada, Australia, Hong Kong – all went crashing down with them.

WHY THE CHANGE?      What was wrong with the old system? Once again, money is at the centre of it all. Before 1986, market-makers were known as ‘jobbers.’      During fixed trading hours, they bought and sold shares hoping to make a profit on the spread between their buying and selling price. The speed of the transactions also depended on how quickly a jobber could obtain cash.      Jobbers were only allowed to deal with each other and brokers, who in turn were the only ones who could act as agents for the public – charging them a commission for dealing with the jobbers on their behalf.      Because the old stock exchange had imposed a scale of fixed commissions for the brokers, and because the cost of the jobbers’ services was met by the investor, the government decided that enough was enough and that these outdated methods were inefficient, restrictive, and expensive.      ‘BIG BANGS’ AND LITTLE BRAINS      The New York Stock Exchange had abandoned fixed commissions in 1975 in favour of negotiated commissions and British brokers realized their incomes would be greatly reduced unless they too could act as market-makers.      So after much haggling and pushing from the government, the London Stock Exchange finally scrapped the rule against outside ownership of broking and jobbing businesses and became deregulated on October 27, 1986.      Now banks, or any other institution with a lot of cash, can go into partnership with stockbrokers and market-makers. This change became known as the ‘Big Bang’ – after the latest theory on the creation of the ever-expanding universe!

It's rather like the old Abbott and Costello joke: ‘Once upon a time there were two Irishmen – now look how many there are!’      (My sincere apologies to the great Irish people – but I suppose the ‘joke’ refers to as well to Belgians, Brits, Poles, Norwegians . . . or even Essex Girls!)