Financial Markets-Types of stock markets

Types of stock markets
1. Orgainsed exchange
This is where the buying and selling of securities is done but buyers and sellers are not present but only the agents internert. This system is called Open outcry
2. Over the counter market
Provides an opportunity for unlisted/unquoted firms to sell their security. OTC is usually organized by the dealers or stock brokers who buy securities themselves and then sell them
Features of OTC markets
a. Prices are relatively low
b. Usually deal with new securities of firms
c. Is composed of small and closely held firm
Financial intermediaries in Kenya
These are institution which link between the savers and investors
Example of financial intermediaries in Kenya
a. Commercial banks
b. Savings and credit associations
c. Credit union
d. Pension funds
e. Life insurance companies
f. Brokers
g. Investment bankers
Stock exchange markets
These are where already held stocks and bonds are bought and sold.
Functions of the Nairobi stock exchange
a. The mobilization of savings for investment in productive enterprises
b. The growth of related financial services sector e.g. insurance pension etc.
c. Encouragement of the divorcement of the owners of capital from managers of capital
d. Encouragement of higher standard of accounting resource management and public disclosure which in turn affords greater efficiency in the process of capital.
e. Encouragement of public floatation of private companies which in turn allows greater growth and increase of the supply of assets available for long term investment.
f. Improvement of access to finance for new and smaller companies
The role of stock exchange in economic development
1. Raising capital for businesses
2. Mobilizing saving for investment
3. Redistribution of wealth
4. Improving corporate governance
5. Creates investment opportunities for small investor
6. Government raises capital for development projects
7. Barameter of the economy
Advantages of investing in shares
a. Income in form of dividends
b. Profits from capital appreciation
c. Shares certificates can be used as a collateral
d. Shares are easily transferable
e. Availability of investment advice
f. Participating in company decision.
Factors to consider when buying shares of a company
1. Economic condition of the country and other non-economic factors
2. State of management of the company
3. Nature of the product dealt in and its market share
4. Marketability of the share
5. Diversification
6. Company’s trading partners
Factors affecting shares prices
1. Recent profit record of the company especially the recent dividend paid
2. The growth prospects of the industry in which the companies operate
3. The publication of a company financial results
4. The general economic condition situation
5. Change in company management
6. Change in government economic policy
7.
Central depository system (C.D.S)
It is a computerized ledger system that enable the holding or transfer of securities without the need for physical movement.
Advantage of C.D.S
1. It shortens the registration process in the stock exchange
2. It improves the liquidity of stock exchange than increase the turnover of the equity shares in the markets.
3. It lowers the clearing and settlement cost, e.g. no need to prepare share certificates and seal them.
4. It is faster and less risky settlement of securities which make the markets more attractive for investor.
5. There will be improved and timely communication between company and the investors hence reduce delay in receiving dividends and rights issues and improves information dissemination concerning the company.
6. It will lead to an efficient and transparent securities markets to adhere to international standard for the benefits of all stakeholders.
Functions of CDS
1. Immobilization of securities i.e. elimination of physical movement of securities
2. Dematerialization i.e. elimination of physical certificates or documents showing entitlement a security so that ownership exist only as computer record
3. Effective delivery vs payment
4. Provision for detailed listing of investors according to the type of securities they hold
5. Effective distribution of dividend. interest, right issues and bonus issues
6. Provision of book entry account i.e. electronic exchange of ownership of securities and payment of cash
Parties involved in CDS
1. Government
2. Capital market authority
3. Nairobi stock exchange
4. Investors
5. Brokers
6. banks

 

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