Chapter 2: Contextual Background
2.2 Overview of Stock Markets
A stock market is a forum where the market participants (buyers and sellers) can trade stocks (ownership claims of businesses) through organised exchanges or over-the-counter markets.
These markets create a platform for the participants to generate wealth through investment gains, dividend incomes, diversification benefits, ownership stakes and tax deferrals. Although the two terms are interchangeably used, a stock exchange is considered a subset of a stock market.
2.2.1 New Zealand Stock market
The New Zealand stock market development dates back to 1866 when the first stock exchange was inaugurated in Dunedin for stock trading with gold mines during the sudden influx of gold in the 1870s. The services of this equity exchange have positively contributed to the development of banking, insurance, shipping, and freezing industries. In the early 1870s, more local exchanges were established in Otago in 1868, Auckland in 1872, Wellington in 1882, Christchurch in 1900, etc. In 1915 Stock Exchange Association of New Zealand was
established to bring the independently ran regional exchanges under one entity. With further refinements to the regulatory framework, operation and monitoring processes impacted forming the New Zealand Stock Exchange (NZSE) in 1983. All the regional exchanges were merged into this exchange. Subsequently, NZSE adapted to technology, shut down the regional trading floors, and established screen trading. In 2002, NZSE became a limited liability company, and in 2003 New Zealand Stock Exchange Limited changed its name to the New Zealand's Exchange (NZX) [32].
2.2.1.1 New Zealand's Exchange (NZX)
New Zealand's Exchange (NZX) is the registered securities exchange in New Zealand. NZX is the responsible authority for enforcing the rules and guidance required for efficient operations of the NZX markets [namely NZX Equity Market (NZSX), NZX Debt Market (NZDX), NZX Dairy Derivatives, NZX Equity Derivatives (NZCX), and Fonterra Shareholders' Market (FSM)] and continuous monitoring for smooth functioning of the markets [33]. The group of S&P/NZX indices evaluates the performance of the listed companies in the NZX. NZX holds a strategic partnership with S&P Dow Jones Indices (S&P DJI). As a result, New Zealand's S&P/NZX indices are closely aligned with the global suite of indices of S&P DJI, which enhances international recognition and global comparison. According to the agreement between NZX and S&P Dow Jones Indices (S&P DJI), S&P DJI is responsible for estimating, maintaining, and licensing the S&P/NZX family of indices [16].
2.2.1.2 New Zealand Stock Index
A stock (market) index is designed and constructed to measure changes in a stock market (or a subset of a stock market). The stock index usually signifies the investors' sentiment towards a set of stocks in the economy and their general opinion of the economy. The S&P/NZX 50 (NZX 50) Index is considered the primary barometer of the New Zealand stock (equity) market.
The NZX 50 Index is the single most-quoted Index in the New Zealand stock market and covers almost 90% of the New Zealand stock market capitalisation. In March 2003, the Index was introduced as the NZSX 50 Index, replacing the NZSE 40 Index as the headline index. The NZSE 40 Index comprised 40 most prominent and liquid companies in the New Zealand stock market, and this was used as the benchmark index before the formation of the NZX 50 Index.
The NZSX 50 Index subsequently renamed the NZX 50 Index in 2005. The NZX 50 Index is designed to measure the overall performance of the 50 leading listed stocks on the NZX Equity Market (NZSX) by float-adjusted market capitalisation. This Index is recognised as New Zealand's main benchmark index. Consequently, the NZX 50 Index [16] is used in this thesis.
2.2.2 Brief History
The Dutch East India Company (VOC), which was formed in March 1602 for the spice trade in East India, is documented as the first publicly traded joint-stock company in the world and issued its stocks and bonds on the Amsterdam Stock Exchange (ASE, [34]). Even though ASE was established in 1602, ASE merged with Brussels Stock Exchange (BRSE, established in 1801) and Paris Stock Exchange (Paris Bourse, founded in the early 19th century) in 2000 to form Euronext. Therefore, the London Stock Exchange (LSE), formed in 1698, is considered the oldest active stock market exchange in the world, followed by the New York Stock Exchange (NYSE in 1792), the American Stock Exchange (AMEX in 1849), the Bombay Stock Exchange (BSE in 1875) and National Association of Securities Dealers Automated Quotation (NASDAQ in 1971). Stock exchanges in the early days used an open-outcry strategy in trading;
however, with the development of technology, most exchanges moved into computer systems to replace floor traders. However, NYSE is one of the rarest stock market exchanges that still uses an open-outcry trading strategy.
Over the last few decades, trading on stock markets has increased exponentially. Every country has its stock market and trades trillions of dollars worth of stocks, bonds, and other marketable securities daily in broader global stock markets. There are more than 60 leading stock exchanges around the globe with varying market capitalisations whose total value is more than USD 78 trillion. There are sixteen stock exchanges in the world, each with more than USD one trillion of market capitalisation. In 2021, the largest stock exchange in the world was the New York Stock Exchange (NYSE) which has a market capitalisation of approximately USD 22.9 trillion. [35]).