Definition of a stock market
It is a market where securities are bought and sold. Securities refer to shares, debentures, treasury bonds, treasury bills etc.
Stock refers to capital detained by a company through the issue of shares. Bonds are debt instruments used to borrow money from the public.
Members of the stock exchange
1. Stock jobbers
These are members who buy and sell securities in their own names. They sell securities at a profit called a ‘turn’
They buy shares in wholesale and hold them for speculative purposes
2. Stock brokers
These are middle men between the investing public and the stock exchange. They are agents who earn a commission from the buyers and sellers. Members of the stock exchange must pass through them for technical advice
Similarities between Jobbers and Brokers
- They both operate in the stock market
- Both don’t hold shares for investment purposes
- Activities of both are regulated by the rules of stock market.
Types of jobbers
1. Bull- this is a speculator in the stock exchange who buys shares in expectations of a rise in their prices.
2. Bear- speculator in the stock exchange who sells shares in the anticipation of a fall in their prices.
3. Stag- a speculator in the stock market who purchases large block of new issues of shares in anticipation in the rise of market price. They buy their shares directly from the companies selling them.
Functions of Stock Exchange
- Provides a ready market for stock, shares, bonds, debentures etc.
- facilitates the flow of new capital into the industry
- Facilitates savings (encourages savings by individuals)
- Protects investors by reasons of the rules of the stock exchange.
- Companies seeking capital are advised and guided by all stages.
- Shows the trend of business in the stock exchange provides an important barometer for business throughout the country.
- Investors are able to obtain capital from the public.
- It enhances the inflow of foreign capital.
- The title to any quoted security is transferred speedily and cheaply.
- Disciplines the company’s management by ensuring that the companies fulfill certain requirements and follow certain rule before securities are listed in the stock exchange.
Quotations in the Stock Exchange
Quotation is consent by the stock exchange for companies’ securities to be dealt with in the stock market i.e. to be bought and sold in the stock market.
Requirements of quotation
- A company must be a public limited company
- It must be registered with the registrar of companies and must submit a certification of registration.
- The company must provide details of the current directors, company lawyers, company secretary, company auditors, financial year end and subsidiaries (branches) of the company.
- Such a company must inform the stock exchange the current distribution of the shares.
- Such a company must be willing to offer the public a minimum number of shares.
- Such a company must pay a clearing fee.
- Such a company must issue a prospectus to the stock exchange. Such a company must issue a statement of dividends and bonds issued in the previous 5 years.
Advantages of Quotations
- A quoted company is able to raise finances quickly and easily.
- A quoted company is considered to be financially stable.
- A quoted company can easily obtain a loan.
- A quoted company can compare itself with other companies.
- There is prestige associated with quoted companies.
- Quoted companies are forced to operate within certain guidelines
- Loss of secrecy- means the company losses its secrecy through the publication of the company’s shares. The secrecy is also lost by inspection of the books of accounts by the shareholders or by the public.
- In case the company’s profits decline this will be revealed to the public and will lower the share prices of such a company.
- There is loss of control to incoming shareholders.
- It is expensive because of the fee payable to the stock market.
- The formalities of quotation are tedious and tiresome.
- Immediately after quotation the prices are likely to be low.
- A quoted company can easily be taken over by people buying shares in the stock exchange.
Terms Use in the Stock Exchange
1. Par value: it is the value of shares printed on the face of the share certificate.
2. Dividends: it is the profit that is distributed to the shareholders
3. Market value: it is the price that is quoted at the stock exchange i.e. the price at which the company’s shares are traded at the stock exchange.
4. Speculation: it is the expectation about the future changes I the share prices.
5. Blue chips- they are shares with a good dividend history e.g. shares of KPLC, Barclays bank.
6. Rights issued- it is an opportunity given to an existing shareholder to purchase additional shares from the company usually at a lower price before they are issued to members of the public.
7. Bonus issued: it is where the existing shareholder is issued with free shares out of the retained earnings.
8. Ex-dividends: It is where the person buying shares doesn’t receive the right to buy additional shares from the company at a lower price if such an opportunity is made available.
9. Cum-dividends: It implies the shares that have been sold to the buyer give the buyer rights to receive dividends if they are declared.
10. Ex-rights: Means the person buying shares doesn’t receive the right to buy additional shares from the company at a lower price if such an opportunity is made available.
11. Cum-rights: Situation where the person buying shares receives