For as long as there has been money in the world there have been those who have wanted to invest it. In the earliest days of financial investment, from the Renaissance in Italy to the 17th century, the main outlet for such cash was government bonds, but everything changed with the birth of the world's first corporations. They ushered in a world of shares, of speculation, of millions made and millions lost and, of course, the earliest stock market crashes. Every day investors buy and sell billions of dollars worth of shares on stock markets from London and Paris to New York and Tokyo. A company's share price can determine whether it will survive as an independent entity, whether it will be taken over, or whether, at the other extreme, it will go bust. Share prices can make people's fortunes and just as easily destroy them.

However, the stock market is no casino. The money people invest directly contributes towards the growth of a company and, by extension, the broader economy. A booming stock market is very often evidence of a thriving, fast-growing economy. This has been true since the first companies -- or to give them their full title, joint-stock companies -- were created to capitalize on the fast-expanding European colonial empires.
The original corporations Although the first recognizable company was the Virginia Company, set up to finance trade with colonists in America, the first major corporation was the British East India Company, which had a government-granted monopoly on trade with British territories in Asia. This was shortly followed by the Dutch East India Company in Amsterdam.

These first companies set themselves apart from their predecessors -- guilds, partnerships and state-run enterprises - in the following ways:

1. How they raised money. The new companies issued shares or, as they are more often known today, equities. Unlike bonds, these give the shareholder formal ownership of a share in the company and, as such, much greater influence over its destiny. Shareholders can determine whether the company should buy or be sold to a rival through a merger or acquisition, and can vote on key issues, including directors' pay.
2. Giving shareholders the right to sell their equities to other investors. This created what is known as a secondary market, the stock market -- as opposed to a primary market, in which the government or a company sells its bonds or shares directly to investors.
3. Invoking so-called limited liability. This means that if a company collapses its shareholders are only liable to lose what they have personally pumped into the business -- not their house and car and all else besides. Companies also took on the legal guise of being a person in their own right -- which gave corporations the right to sign contracts, own property and pay taxes themselves, independently of their shareholders.

As owners of the company, shareholders are entitled to a share in its profits. Provided the company is making surplus cash, after its running costs and investment plans are borne in mind, shareholders receive an annual dividend or payment They can also profit when the value of the share increases, though they risk losing their investment if its value falls. If the company collapses, shareholders are further back in the queue to receive a payout than bondholders, so shares are generally regarded as riskier investments than debt.

In broad terms, companies can be divided into two types. There are those which are private or unlisted, whose shares are not on the open market. These are usually smaller companies, their shares typically owned solely by their directors and perhaps the family of the founder(s), banks and the original investors. Then there are those listed publicly - in other words, on stock markets.

The stock market The traditional image of a stock market is of a bustling, chaotic trading floor with aggressive traders shouting 'buy' and 'sell' at the top of their voices. In fact, there are very few so-called open-outcry markets left in the world - the main existing ones include the London Metals Exchange and the Chicago Mercantile Exchange. These trading floors have been replaced by computerized systems, allowing investors to trade directly from anywhere around the world.

Those who believe that the market is set to go up are known as bulls while those who expect a fall are referred to as bears. When investors become excited by the prospects of a particular company, they flock to buy its shares, which pushes the price higher. In contrast, if a company is struggling, investors will generally sell its stock and thus push the price lower.

En masse, investors are driven by a combination of fear and greed, and occasionally greed overpowers fear, causing a stock market bubble -- where prices become overvalued -- and sometimes fear overcomes greed, leading to the inevitable crash as shares come back down to earth with a bump. Stock markets in New York, London and elsewhere have suffered major bubbles in the last hundred years. Although the most notorious was the Wall Street Crash in 1929, share prices plummeted even more on Black Monday in 1987, when the Dow Jones dropped 22.6 per cent in a single day. Markets worldwide also suffered major falls following the dot-com crash between 2000 and 2002, and the financial crisis of 2008.

The Big Investors

Participants in the stock market are split between individual investors, such as households with portfolios, and institutional investors, including pension funds, insurance groups, fund managers, banks and other institutions. Since pension and insurance funds own such a major stake in the stock market, changes in share prices indirectly affect almost every individual citizen.

Among the most maligned of the other investors are hedge funds, which not only buy shares but short sell them, meaning they make a bet on its value dropping. (The process of shorting stocks involves borrowing shares from another investor at a certain price, say $100, selling them on to the market at that price, waiting for the share to fall to, say $80, then buying it at the cheaper price, handing it back to the investor and pocketing the $20 difference.) Another type of investor is the private equity firm, which aims to buy up and overhaul struggling or undervalued businesses.

Many have come to see new investors such as private equity and hedge funds as a threat to the market, since they are highly secretive and are often seen to be blackmailing companies. They argue, however, that they have an invaluable market function by buying up undervalued or underperforming companies and overhauling them. After all, stock markets, where companies can be bought by members of the public, are inherently democratic institutions.