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 Home > By Career > Banking and Finance > Securities and Trading
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Security (finance)
A security is generally a fungible, negotiable financial instrument representing
financial value.Securities are broadly categorized into:
• debt securities (such as banknotes, bonds and debentures),
• equity securities, e.g., common stocks; and,
• derivative contracts, such as forwards, futures, options and swaps.
The company or other entity issuing the security is called the issuer. A country's
regulatory structure determines what qualifies as a security. For example, private
investment pools may have some features of securities, but they may not be registered
or regulated as such if they meet various restrictions.
Securities may be represented by a certificate or, more typically, "non-certificated",
that is in electronic or "book entry" only form. Certificates may be bearer, meaning
they entitle the holder to rights under the security merely by holding the security,
or registered, meaning they entitle the holder to rights only if he appears on a
security register maintained by the issuer or an intermediary. They include shares
of corporate stock or mutual funds, bonds issued by corporations or governmental
agencies, stock options or other options, limited partnership units, and various
other formal investment instruments that are negotiable and fungible.
Classification
Securities may be classified according to many categories or classification systems:
• Currency of denomination
• Ownership rights
• Term to maturity
• Degree of liquidity
• Income payments
• Tax treatment
• Credit rating
• Industrial sector or "industry". ("Sector" often refers to a higher level or broader
category, such as Consumer Discretionary, whereas "industry" often refers to a lower
level classification, such as Consumer Appliances. See Industry for a discussion
of some classification systems.)
• Region or country (such as country of incorporation, country of principal sales/market
of its products or services, or country in which the principal securities exchange
where it trades is located)
• Market capitalization
• State (typically for municipal or "tax-free" bonds in the U.S.)
New capital
Commercial enterprises have traditionally used securities as a means of raising
new capital. Securities may be an attractive option relative to bank loans depending
on their pricing and market demand for particular characteristics. Another disadvantage
of bank loans as a source of financing is that the bank may seek a measure of protection
against default by the borrower via extensive financial covenants. Through securities,
capital is provided by investors who purchase the securities upon their initial
issuance. In a similar way, the governments may raise capital through the issuance
of securities (see government debt).
Repackaging
In recent decades, securities have been issued to repackage existing assets. In
a traditional securitization, a financial institution may wish to remove assets
from its balance sheet to achieve regulatory capital efficiencies or to accelerate
its receipt of cash flow from the original assets. Alternatively, an intermediary
may wish to make a profit by acquiring financial assets and repackaging them in
a way more attractive to investors. In other words, a basket of assets is typically
contributed or placed into a separate legal entity such as a trust or SPV, which
subsequently issues shares of equity interest to investors. This allows the sponsor
entity to more easily raise capital for these assets as opposed to finding buyers
to purchase directly such assets.
By type of holder
Investors in securities may be retail, i.e. members of the public investing other
than by way of business. The greatest part in terms of volume of investment is wholesale,
i.e. by financial institutions acting on their own account, or on behalf of clients.
Important institutional investors include investment banks, insurance companies,
pension funds and other managed funds.
Investment
The traditional economic function of the purchase of securities is investment, with
the view to receiving income and/or achieving capital gain. Debt securities generally
offer a higher rate of interest than bank deposits, and equities may offer the prospect
of capital growth. Equity investment may also offer control of the business of the
issuer. Debt holdings may also offer some measure of control to the investor if
the company is a fledgling start-up or an old giant undergoing 'restructuring'.
In these cases, if interest payments are missed, the creditors may take control
of the company and liquidate it to recover some of their investment.
Collateral
The last decade has seen an enormous growth in the use of securities as collateral.
Purchasing securities with borrowed money secured by other securities or cash itself
is called "buying on margin". Where A is owed a debt or other obligation by B, A
may require B to deliver property rights in securities to A, either at inception
(transfer of title) or only in default (non-transfer-of-title institutional). For
institutional loans property rights are not transferred but nevertheless enable
A to satisfy its claims in the event that B fails to make good on its obligations
to A or otherwise becomes insolvent. Collateral arrangements are divided into two
broad categories, namely security interests and outright collateral transfers. Commonly,
commercial banks, investment banks, government agencies and other institutional
investors such as mutual funds are significant collateral takers as well as providers.
In addition, private parties may utilize stocks or other securities as collateral
for portfolio loans in securities lending scenarios.
On the consumer level, loans against securities have grown into three distinct groups
over the last decade: 1) Standard Institutional Loans, generally offering low loan-to-value
with very strict call and coverage regimens, akin to standard margin loans; 2) Transfer-of-Title
(ToT) Loans, typically provided by private parties where borrower ownership is completely
extinguished save for the rights provided in the loan contract; and 3) Non-Transfer-of-Title
Credit Line facilities where shares are not sold and they serve as assets in a standard
lien-type line of cash credit. Of the three, transfer-of-title loans have fallen
into the very high-risk category as the number of providers have dwindled as regulators
have launched an industry-wide crackdown on transfer-of-title structures where the
private lender may sell or sell short the securities to fund the loan. See sell
short. Institutionally managed consumer securities-based loans, on the other hand,
draw loan funds from the financial resources of the lending institution, not from
the sale of the securities.
Debt and equity
Securities are traditionally divided into debt securities and equities (see also
derivatives).
Debt
Debt securities may be called debentures, bonds, deposits, notes or commercial paper
depending on their maturity and certain other characteristics. The holder of a debt
security is typically entitled to the payment of principal and interest, together
with other contractual rights under the terms of the issue, such as the right to
receive certain information. Debt securities are generally issued for a fixed term
and redeemable by the issuer at the end of that term. Debt securities may be protected
by collateral or may be unsecured, and, if they are unsecured, may be contractually
"senior" to other unsecured debt meaning their holders would have a priority in
a bankruptcy of the issuer. Debt that is not senior is "subordinated".
Corporate bonds represent the debt of commercial or industrial entities. Debentures
have a long maturity, typically at least ten years, whereas notes have a shorter
maturity. Commercial paper is a simple form of debt security that essentially represents
a post-dated check with a maturity of not more than 270 days.
Money market instruments are short term debt instruments that may have characteristics
of deposit accounts, such as certificates of deposit, and certain bills of exchange.
They are highly liquid and are sometimes referred to as "near cash". Commercial
paper is also often highly liquid.
Euro debt securities are securities issued internationally outside their domestic
market in a denomination different from that of the issuer's domicile. They include
eurobonds and euronotes. Eurobonds are characteristically underwritten, and not
secured, and interest is paid gross. A euronote may take the form of euro-commercial
paper (ECP) or euro-certificates of deposit.
Government bonds are medium or long term debt securities issued by sovereign governments
or their agencies. Typically they carry a lower rate of interest than corporate
bonds, and serve as a source of finance for governments. U.S. federal government
bonds are called treasuries. Because of their liquidity and perceived low risk,
treasuries are used to manage the money supply in the open market operations of
non-US central banks.
Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent
the debt of state, provincial, territorial, municipal or other governmental units
other than sovereign governments.
Supranational bonds represent the debt of international organizations such as the
World Bank, the International Monetary Fund, regional multilateral development banks
and others.
Equity
An equity security is a share of equity interest in an entity such as the capital
stock of a company, trust or partnership. The most common form of equity interest
is common stock, although preferred equity is also a form of capital stock. The
holder of an equity is a shareholder, owning a share, or fractional part of the
issuer. Unlike debt securities, which typically require regular payments (interest)
to the holder, equity securities are not entitled to any payment. In bankruptcy,
they share only in the residual interest of the issuer after all obligations have
been paid out to creditors. However, equity generally entitles the holder to a pro
rata portion of control of the company, meaning that a holder of a majority of the
equity is usually entitled to control the issuer. Equity also enjoys the right to
profits and capital gain, whereas holders of debt securities receive only interest
and repayment of principal regardless of how well the issuer performs financially.
Furthermore, debt securities do not have voting rights outside of bankruptcy. In
other words, equity holders are entitled to the "upside" of the business and to
control the business.
• Stock
Hybrid
Hybrid securities combine some of the characteristics of both debt and equity securities.
Preference shares form an intermediate class of security between equities and debt.
If the issuer is liquidated, they carry the right to receive interest and/or a return
of capital in priority to ordinary shareholders. However, from a legal perspective,
they are capital stock and therefore may entitle holders to some degree of control
depending on whether they contain voting rights.
Convertibles are bonds or preferred stock that can be converted, at the election
of the holder of the convertibles, into the common stock of the issuing company.
The convertibility, however, may be forced if the convertible is a callable bond,
and the issuer calls the bond. The bondholder has about 1 month to convert it, or
the company will call the bond by giving the holder the call price, which may be
less than the value of the converted stock. This is referred to as a forced conversion.
Equity warrants are options issued by the company that allow the holder of the warrant
to purchase a specific number of shares at a specified price within a specified
time. They are often issued together with bonds or existing equities, and are, sometimes,
detachable from them and separately tradeable. When the holder of the warrant exercises
it, he pays the money directly to the company, and the company issues new shares
to the holder.
Warrants, like other convertible securities, increases the number of shares outstanding,
and are always accounted for in financial reports as fully diluted earnings per
share, which assumes that all warrants and convertibles will be exercised.
The securities markets
Primary and secondary market
In the U.S., the public securities markets can be divided into primary and secondary
markets. The distinguishing difference between the two markets is that in the primary
market, the money for the securities is received by the issuer of those securities
from investors, typically in an initial public offering transaction, whereas in
the secondary market, the securities are simply assets held by one investor selling
them to another investor (money goes from one investor to the other). An initial
public offering is when a company issues public stock newly to investors, called
an "IPO" for short. A company can later issue more new shares, or issue shares that
have been previously registered in a shelf registration. These later new issues
are also sold in the primary market, but they are not considered to be an IPO but
are often called a "secondary offering". Issuers usually retain investment banks
to assist them in administering the IPO, obtaining SEC (or other regulatory body)
approval of the offering filing, and selling the new issue. When the investment
bank buys the entire new issue from the issuer at a discount to resell it at a markup,
it is called a firm commitment underwriting. However, if the investment bank considers
the risk too great for an underwriting, it may only assent to a best effort agreement,
where the investment bank will simply do its best to sell the new issue.
For the primary market to thrive, there must be a secondary market, or aftermarket
that provides liquidity for the investment security—where holders of securities
can sell them to other investors for cash. Otherwise, few people would purchase
primary issues, and, thus, companies and governments would be restricted in raising
equity capital (money) for their operations. Organized exchanges constitute the
main secondary markets. Many smaller issues and most debt securities trade in the
decentralized, dealer-based over-the-counter markets.
In Europe, the principal trade organization for securities dealers is the International
Capital Market Association. In the U.S., the principal trade organization for securities
dealers is the Securities Industry and Financial Markets Association, which is the
result of the merger of the Securities Industry Association and the Bond Market
Association. The Financial Information Services Division of the Software and Information
Industry Association (FISD/SIIA) represents a round-table of market data industry
firms, referring to them as Consumers, Exchanges, and Vendors.
Public offer and private placement
In the primary markets, securities may be offered to the public in a public offer.
Alternatively, they may be offered privately to a limited number of qualified persons
in a private placement. Sometimes a combination of the two is used. The distinction
between the two is important to securities regulation and company law. Privately
placed securities are not publicly tradable and may only be bought and sold by sophisticated
qualified investors. As a result, the secondary market is not nearly as liquid as
it is for public (registered) securities.
Another category, sovereign bonds, is generally sold by auction to a specialized
class of dealers.
Listing and OTC dealing
Securities are often listed in a stock exchange, an organized and officially recognized
market on which securities can be bought and sold. Issuers may seek listings for
their securities to attract investors, by ensuring there is a liquid and regulated
market that investors can buy and sell securities in.
Growth in informal electronic trading systems has challenged the traditional business
of stock exchanges. Large volumes of securities are also bought and sold "over the
counter" (OTC). OTC dealing involves buyers and sellers dealing with each other
by telephone or electronically on the basis of prices that are displayed electronically,
usually by commercial information vendors such as Reuters and Bloomberg.
There are also eurosecurities, which are securities that are issued outside their
domestic market into more than one jurisdiction. They are generally listed on the
Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing
eurobonds include regulatory and tax considerations, as well as the investment restrictions.
Market
London is the centre of the eurosecurities markets. There was a huge rise in the
eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities
is currently effected through two European computerized clearing/depositories called
Euroclear (in Belgium) and Clearstream (formerly Cedelbank) in Luxembourg.
The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and Euronext.
There are ramp up market in Emergent countries, but it is growing slowly.
Physical nature of securities
Certificated securities
Securities that are represented in paper (physical) form are called certificated
securities. They may be bearer or registered.
Bearer securities
Bearer securities are completely negotiable and entitle the holder to the rights
under the security (e.g. to payment if it is a debt security, and voting if it is
an equity security). They are transferred by delivering the instrument from person
to person. In some cases, transfer is by endorsement, or signing the back of the
instrument, and delivery.
Regulatory and fiscal authorities sometimes regard bearer securities negatively,
as they may be used to facilitate the evasion of regulatory restrictions and tax.
In the United Kingdom, for example, the issue of bearer securities was heavily restricted
firstly by the Exchange Control Act 1947 until 1953. Bearer securities are very
rare in the United States because of the negative tax implications they may have
to the issuer and holder.
Registered securities
In the case of registered securities, certificates bearing the name of the holder
are issued, but these merely represent the securities. A person does not automatically
acquire legal ownership by having possession of the certificate. Instead, the issuer
(or its appointed agent) maintains a register in which details of the holder of
the securities are entered and updated as appropriate. A transfer of registered
securities is effected by amending the register.
Non-certificated securities and global certificates
Modern practice has developed to eliminate both the need for certificates and maintenance
of a complete security register by the issuer. There are two general ways this has
been accomplished.
Non-certificated securities
In some jurisdictions, such as France, it is possible for issuers of that jurisdiction
to maintain a legal record of their securities electronically.
In the United States, the current "official" version of Article 8 of the Uniform
Commercial Code permits non-certificated securities. However, the "official" UCC
is a mere draft that must be enacted individually by each of the U.S. states. Though
all 50 states (as well as the District of Columbia and the U.S. Virgin Islands)
have enacted some form of Article 8, many of them still appear to use older versions
of Article 8, including some that did not permit non-certificated securities.
In the U.S. today, most mutual funds issue only non-certificated shares to shareholders,
though some may issue certificates only upon request and may charge a fee. Shareholders
typically don't need certificates except for perhaps pledging such shares as collateral
for a loan.
Global certificates, book entry interests, depositories
To facilitate the electronic transfer of interests in securities without dealing
with inconsistent versions of Article 8, a system has developed whereby issuers
deposit a single global certificate representing all the outstanding securities
of a class or series with a universal depository. This depository is called The
Depository Trust Company, or DTC. DTC's parent, Depository Trust & Clearing Corporation
(DTCC), is a non-profit cooperative owned by approximately thirty of the largest
Wall Street players that typically act as brokers or dealers in securities. These
thirty banks are called the DTC participants. DTC, through a legal nominee, owns
each of the global securities on behalf of all the DTC participants.
All securities traded through DTC are in fact held, in electronic form, on the books
of various intermediaries between the ultimate owner, e.g. a retail investor, and
the DTC participants. For example, Mr. Smith may hold 100 shares of Coca Cola, Inc.
in his brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co.
may hold 1000 shares of Coca Cola on behalf of Mr. Smith and nine other customers.
These 1000 shares are held by Jones & Co. in an account with Goldman Sachs, a DTC
participant, or in an account at another DTC participant. Goldman Sachs in turn
may hold millions of Coca Cola shares on its books on behalf of hundreds of brokers
similar to Jones & Co. Each day, the DTC participants settle their accounts with
the other DTC participants and adjust the number of shares held on their books for
the benefit of customers like Jones & Co. Ownership of securities in this fashion
is called beneficial ownership. Each intermediary holds on behalf of someone beneath
him in the chain. The ultimate owner is called the beneficial owner. This is also
referred to as owning in "Street name".
Among brokerages and mutual fund companies, a large amount of mutual fund share
transactions take place among intermediaries as opposed to shares being sold and
redeemed directly with the transfer agent of the fund. Most of these intermediaries
such as brokerage firms clear the shares electronically through the National Securities
Clearing Corp. or "NSCC", a subsidiary of DTCC.
Other depositories: Euroclear and Clearstream
Besides DTC, two other large securities depositories exist, both in Europe: Euroclear
and Clearstream.
Divided and undivided security
The terms "divided" and "undivided" relate to the proprietary nature of a security.
Each divided security constitutes a separate asset, which is legally distinct from
each other security in the same issue. Pre-electronic bearer securities were divided.
Each instrument constitutes the separate covenant of the issuer and is a separate
debt.
With undivided securities, the entire issue makes up one single asset, with each
of the securities being a fractional part of this undivided whole. Shares in the
secondary markets are always undivided. The issuer owes only one set of obligations
to shareholders under its memorandum, articles of association and company law. A
share represents an undivided fractional part of the issuing company. Registered
debt securities also have this undivided nature.
Fungible and non-fungible security
The terms "fungible" and "non-fungible" are a feature of assets.
If an asset is fungible, this means that if such an asset is lent, or placed with
a custodian, it is customary for the borrower or custodian to be obliged at the
end of the loan or custody arrangement to return assets equivalent to the original
asset, rather than the specific identical asset. In other words, the redelivery
of fungibles is equivalent and not in specie[disambiguation needed]. In other words,
if an owner of 100 shares of IBM transfers custody of those shares to another party
to hold for a purpose, at the end of the arrangement, the holder need simply provide
the owner with 100 shares of IBM identical to those received. Cash is also an example
of a fungible asset. The exact currency notes received need not be segregated and
returned to the owner.
Undivided securities are always fungible by logical necessity. Divided securities
may or may not be fungible, depending on market practice. The clear trend is towards
fungible arrangements.
Regulation
In the United States, the public offer and sale of securities must be either registered
pursuant to a registration statement that is filed with the U.S. Securities and
Exchange Commission (SEC) or are offered and sold pursuant to an exemption therefrom.
Dealing in securities is regulated by both federal authorities (SEC) and state securities
departments. In addition, the brokerage industry is supposedly self policed by Self
Regulatory Organizations (SROs), such as the Financial Industry Regulatory Authority
(FINRA), formerly the National Association of Securities Dealers (or NASD) or the
MSRB.
With respect to investment schemes that do not fall within the traditional categories
of securities listed in the definition of a security (Sec. 2(a)(1) of the 33 act
and Sec. 3(a)(10) of the 34 act) the US Courts have developed a broad definition
for securities that must then be registered with the SEC. When determining if there
a is an "investment contract" that must be registered the courts look for an investment
of money, a common enterprise and expectation of profits to come primarily from
the efforts of others. See SEC v. W.J. Howey Co. and SEC v. Glenn W. Turner
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Trading
Trade is the transfer of ownership of goods and services from one person or entity
to another. Trade is sometimes loosely called commerce or financial transaction
or barter. A network that allows trade is called a market. The original form of
trade was barter, the direct exchange of goods and services. Later one side of the
barter were the metals, precious metals (poles, coins), bill, paper money. Modern
traders instead generally negotiate through a medium of exchange, such as money.
As a result, buying can be separated from selling, or earning. The invention of
money (and later credit, paper money and non-physical money) greatly simplified
and promoted trade. Trade between two traders is called bilateral trade, while trade
between more than two traders is called multilateral trade.
Trade exists for man due to specialization and division of labor, most people concentrate
on a small aspect of production, trading for other products. Trade exists between
regions because different regions have a comparative advantage in the production
of some tradable commodity, or because different regions' size allows for the benefits
of mass production. As such, trade at market prices between locations benefits both
locations.
Retail trade consists of the sale of goods or merchandise from a very fixed location,
such as a department store, boutique or kiosk, or by mail, in small or individual
lots for direct consumption by the purchaser.[1] Wholesale trade is defined as the
sale of goods or merchandise to retailers, to industrial, commercial, institutional,
or other professional business users, or to other wholesalers and related subordinated
services.
Trading can also refer to the action performed by traders and other market agents
in the financial markets.
History of trade
Prehistory
Trade originated with the start of communication in prehistoric times. Trading was
the main facility of prehistoric people, who bartered goods and services from each
other before the innovation of the modern day currency. Peter Watson dates the history
of long-distance commerce from circa 150,000 years ago.
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Trader in Germany, 16th century
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Ancient History
Trade is believed to have taken place throughout much of recorded human history.
There is evidence of the exchange of obsidian and flint during the stone age. Materials
used for creating jewelry were traded with Egypt since 3000 BC. Long-range trade
routes first appeared in the 3rd millennium BC, when Sumerians in Mesopotamia traded
with the Harappan civilization of the Indus Valley. The Phoenicians were noted sea
traders, traveling across the Mediterranean Sea, and as far north as Britain for
sources of tin to manufacture bronze. For this purpose they established trade colonies
the Greeks called emporia. From the beginning of Greek civilization until the fall
of the Roman empire in the 5th century, a financially lucrative trade brought valuable
spice to Europe from the far east, including India and China. Roman commerce allowed
its empire to flourish and endure. The Roman empire produced a stable and secure
transportation network that enabled the shipment of trade goods without fear of
significant piracy.
The fall of the Roman empire, and the succeeding Dark Ages brought instability to
Western Europe and a near collapse of the trade network in the western world. Trade
however continued to flourish among the kingdoms of Africa, Middle East, India,
China and Southeast Asia. Some trade did occur in the west. For instance, Radhanites
were a medieval guild or group (the precise meaning of the word is lost to history)
of Jewish merchants who traded between the Christians in Europe and the Muslims
of the Near East.
Middle Ages
During the Middle Ages, Central Asia was the economic center of the world.The Sogdians
dominated the East-West trade route known as the Silk Road after the 4th century
AD up to the 8th century AD, with Suyab and Talas ranking among their main centers
in the north. They were the main caravan merchants of Central Asia.
From the 8th to the 11th century, the Vikings and Varangians traded as they sailed
from and to Scandinavia. Vikings sailed to Western Europe, while Varangians to Russia.
The Hanseatic League was an alliance of trading cities that maintained a trade monopoly
over most of Northern Europe and the Baltic, between the 13th and 17th centuries.
Age of Discovery
Vasco da Gama pioneered the European Spice trade in 1498 when he reached Calicut
after sailing around the Cape of Good Hope at the southern tip of the African continent.
Prior to this, the flow of spice into Europe from India was controlled by Islamic
powers, especially Egypt. The spice trade was of major economic importance and helped
spur the Age of Discovery in Europe. Spices brought to Europe from the Eastern world
were some of the most valuable commodities for their weight, sometimes rivaling
gold.
In the 16th century, the Seventeen Provinces were the centre of free trade, imposing
no exchange controls, and advocating the free movement of goods. Trade in the East
Indies was dominated by Portugal in the 16th century, Holland in the 17th century,
and the British in the 18th century. The Spanish Empire developed regular trade
links across both the Atlantic and the Pacific Oceans.
In 1776, Adam Smith published the paper An Inquiry into the Nature and Causes of
the Wealth of Nations. It criticised Mercantilism, and argued that economic specialisation
could benefit nations just as much as firms. Since the division of labour was restricted
by the size of the market, he said that countries having access to larger markets
would be able to divide labour more efficiently and thereby become more productive.
Smith said that he considered all rationalisations of import and export controls
"dupery", which hurt the trading nation as a whole for the benefit of specific industries.
In 1799, the Dutch East India Company, formerly the world's largest company, became
bankrupt, partly due to the rise of competitive free trade.
Age of Reason
In 1817, David Ricardo, James Mill and Robert Torrens showed that free trade would
benefit the industrially weak as well as the strong, in the famous theory of comparative
advantage. In Principles of Political Economy and Taxation Ricardo advanced the
doctrine still considered the most counterintuitive in economics:
When an inefficient producer sends the merchandise it produces best to a country
able to produce it more efficiently, both countries benefit. The ascendancy of free
trade was primarily based on national advantage in the mid 19th century. That is,
the calculation made was whether it was in any particular country's self-interest
to open its borders to imports.
John Stuart Mill proved that a country with monopoly pricing power on the international
market could manipulate the terms of trade through maintaining tariffs, and that
the response to this might be reciprocity in trade policy. Ricardo and others had
suggested this earlier. This was taken as evidence against the universal doctrine
of free trade, as it was believed that more of the economic surplus of trade would
accrue to a country following reciprocal, rather than completely free, trade policies.
This was followed within a few years by the infant industry scenario developed by
Mill promoting the theory that government had the "duty" to protect young industries,
although only for a time necessary for them to develop full capacity. This became
the policy in many countries attempting to industrialise and out-compete English
exporters. Milton Friedman later continued this vein of thought, showing that in
a few circumstances tariffs might be beneficial to the host country; but never for
the world at large.
20th Century
The Great Depression was a major economic recession that ran from 1929 to the late
1930s. During this period, there was a great drop in trade and other economic indicators.
The lack of free trade was considered by many as a principal cause of the depression.
Only during the World War II the recession ended in the United States. Also during
the war, in 1944, 44 countries signed the Bretton Woods Agreement, intended to prevent
national trade barriers, to avoid depressions. It set up rules and institutions
to regulate the international political economy: the International Monetary Fund
and the International Bank for Reconstruction and Development (later divided into
the World Bank and Bank for International Settlements). These organisations became
operational in 1946 after enough countries ratified the agreement. In 1947, 23 countries
agreed to the General Agreement on Tariffs and Trade to promote free trade.
Free Trade
Free trade advanced further in the late 20th century and early 2000s:
• 1992 European Union lifted barriers to internal trade in goods and labour.
• January 1, 1994 the North American Free Trade Agreement (NAFTA) took effect
• 1994 The GATT Marrakech Agreement specified formation of the WTO.
• January 1, 1995 World Trade Organization was created to facilitate free trade,
by mandating mutual most favoured nation trading status between all signatories.
• EC was transformed into the European Union, which accomplished the Economic and
Monnetary Union (EMU) in 2002, through introducing the Euro, and creating this way
a real single market between 13 member states as of January 1, 2007.
• 2005, the Central American Free Trade Agreement was signed; It includes the United
States and the Dominican Republic.
Protectionism
Protectionism is the policy of restraining and discouraging trade between states
and contrasts with the policy of free trade. This policy often takes of form of
tariffs and restricitive quotas. Protectionist policies were perticularly prevelent
in the 1930s, between the great depression and the onset of World War II.
Religion
Muslim teachings encourage trading (and condemn usury).
Judeo-Christian teachings encourage traders to avoid dishonest gain.[citation needed]
Development of money
The first instances of money were objects with intrinsic value. This is called commodity
money and includes any commonly available commodity that has intrinsic value; historical
examples include pigs, rare seashells, whale's teeth, and (often) cattle. In medieval
Iraq, bread was used as an early form of money. In Mexico under Montezuma[disambiguation
needed] cocoa beans were money.
Currency was introduced as a standardised money to facilitate a wider exchange of
goods and services. This first stage of currency, where metals were used to represent
stored value, and symbols to represent commodities, formed the basis of trade in
the Fertile Crescent for over 1500 years.
Numismatists have examples of coins from the earliest large-scale societies, although
these were initially unmarked lumps of precious metal.
Ancient Sparta minted coins from iron to discourage its citizens from engaging in
foreign trade.
Current trends
Doha rounds
The Doha round of World Trade Organization negotiations aims to lower barriers to
trade around the world, with a focus on making trade fairer for developing countries.
Talks have been hung over a divide between the rich developed countries, represented
by the G20, and the major developing countries. Agricultural subsidies are the most
significant issue upon which agreement has been hardest to negotiate. By contrast,
there was much agreement on trade facilitation and capacity building.
The Doha round began in Doha, Qatar, and negotiations have subsequently continued
in: Cancún, Mexico; Geneva, Switzerland; and Paris, France and Hong Kong.
China
Beginning around 1978, the government of the People's Republic of China (PRC) began
an experiment in economic reform. In contrast to the previous Soviet-style centrally
planned economy, the new measures progressively relaxed restrictions on farming,
agricultural distribution and, several years later, urban enterprises and labor.
The more market-oriented approach reduced inefficiencies and stimulated private
investment, particularly by farmers, that led to increased productivity and output.
One feature was the establishment of four (later five) Special Economic Zones located
along the South-east coast.
The reforms proved spectacularly successful in terms of increased output, variety,
quality, price and demand. In real terms, the economy doubled in size between 1978
and 1986, doubled again by 1994, and again by 2003. On a real per capita basis,
doubling from the 1978 base took place in 1987, 1996 and 2006. By 2008, the economy
was 16.7 times the size it was in 1978, and 12.1 times its previous per capita levels.
International trade progressed even more rapidly, doubling on average every 4.5
years. Total two-way trade in January 1998 exceeded that for all of 1978; in the
first quarter of 2009, trade exceeded the full-year 1998 level. In 2008, China's
two-way trade totaled US$2.56 trillion.
In 1991 the PRC joined the Asia-Pacific Economic Cooperation group, a trade-promotion
forum. In 2001, it also joined the World Trade Organization. See also: Economy of
the People's Republic of China
International trade
International trade is the exchange of goods and services across national borders.
In most countries, it represents a significant part of GDP. While international
trade has been present throughout much of history (see Silk Road, Amber Road), its
economic, social, and political importance have increased in recent centuries, mainly
because of Industrialization, advanced transportation, globalization, multinational
corporations, and outsourcing. In fact, it is probably the increasing prevalence
of international trade that is usually meant by the term "globalization".
Empirical evidence for the success of trade can be seen in the contrast between
countries such as South Korea, which adopted a policy of export-oriented industrialization,
and India, which historically had a more closed policy (although it has begun to
open its economy, as of 2005). South Korea has done much better by economic criteria
than India over the past fifty years, though its success also has to do with effective
state institutions.
Trade sanctions
Trade sanctions against a specific country are sometimes imposed, in order to punish
that country for some action. An embargo, a severe form of externally imposed isolation,
is a blockade of all trade by one country on another. For example, the United States
has had an embargo against Cuba for over 40 years.
Trade barriers
Although there are usually few trade restrictions within countries, international
trade is usually regulated by governmental quotas and restrictions, and often taxed
by tariffs. Tariffs are usually on imports, but sometimes countries may impose export
tariffs or subsidies. All of these are called trade barriers. If a government removes
all trade barriers, a condition of free trade exists. A government that implements
a protectionist policy establishes trade barriers.
Fair trade
The fair trade movement, also known as the trade justice movement, promotes the
use of labour, environmental and social standards for the production of commodities,
particularly those exported from the Third and Second Worlds to the First World.
Such ideas have also sparked a debate on whether trade itself should be codified
as a human right.
Importing firms voluntarily adhere to fair trade standards or governments may enforce
them through a combination of employment and commercial law. Proposed and practiced
fair trade policies vary widely, ranging from the common prohibition of goods made
using slave labour to minimum price support schemes such as those for coffee in
the 1980s. Non-governmental organizations also play a role in promoting fair trade
standards by serving as independent monitors of compliance with fair trade labeling
requirements.
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