STOCK MARKET NOTES
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
- 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 - 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
- Bull- this is a speculator in the stock exchange who buys shares in
expectations of a rise in their prices. - Bear- speculator in the stock exchange who sells shares in the
anticipation of a fall in their prices. - 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
Disadvantages
- 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
- Par value: it is the value of shares printed on the face of the share
certificate. - Dividends: it is the profit that is distributed to the shareholders
- 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. - Speculation: it is the expectation about the future changes I the
share prices. - Blue chips- they are shares with a good dividend history e.g. shares
of KPLC, Barclays bank. - 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. - Bonus issued: it is where the existing shareholder is issued with
free shares out of the retained earnings. - 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. - Cum-dividends: It implies the shares
that have been sold to the buyer give the buyer rights to receive dividends if they are declared. - 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. - Cum-rights: Situation where the person buying shares receives
