The Role and The Role and Function of a Stock Function of a Stock
ExchangeExchange ByBy
Enid E BissemberEnid E Bissember
GASCIGASCI
OutlineOutline
• Overview of financial Overview of financial markets markets
• Institutional infrastructure Institutional infrastructure • Role and functions of stock Role and functions of stock
exchangeexchange
OverviewOverview of of Financial Financial Markets Markets
• Two types of financial markets • Money markets• Capital markets
• Primary market • Secondary market
The Hierarchy of Markets
Money market
Government bond market
Corporate bonds & equities
Asset backed securities & derivatives
Gov’t T Bills
Financial Market
Money market Capital market
Primary market Second
ary market
Commercial banks
Firms raise capital
Investors trade securities issued in primary market
debt
equity
Public Private placement
Short term instruments
Primary Mkt Inst
Stock exchange
Credit unions
Insurance cos
NIS
Supporting
agents
Market infrastructureMarket infrastructure
• Stock exchange Stock exchange • Clearing and settlementClearing and settlement• Education and training Education and training • Investors’ protection Investors’ protection • Rating agencyRating agency
InstrumentsInstruments•Equities Equities
•Bonds Bonds
Most popular investing instruments
Stocks and shares
Bonus issues
Rights issues
Corporate Government
Intermediaries Intermediaries
• Brokerage houses Brokerage houses
• Stock brokers Stock brokers • Advisors Advisors
Hand in Hand Beharry stockbrokers Trust company GuyAmerica
Regulation & SupervisionRegulation & Supervision
A A few questions few questions • Ever wondered how the capital Ever wondered how the capital
markets workmarkets work• Who sets the rulesWho sets the rules• What does the stock exchange doWhat does the stock exchange do• What is the role of the stock brokerWhat is the role of the stock broker• How to become a registered broker How to become a registered broker
The Regulator
• Foremost authority presiding over the capital markets
• With mission to promote and maintain Fair, efficient , secure and transparent market and to facilitate the orderly development of the stock exchange
Role and Functions of Role and Functions of a stock exchange a stock exchange
Established for the Established for the purpose of assisting, purpose of assisting, regulating and controlling regulating and controlling business of buying, business of buying, selling and dealing in selling and dealing in securities securities
Role and Functions of Role and Functions of a stock exchange cont’d a stock exchange cont’d
• Provides a market for the trading of Provides a market for the trading of securities to individuals and securities to individuals and organizations seeking to invest organizations seeking to invest their saving or excess funds their saving or excess funds through the purchase of securitiesthrough the purchase of securities
Role and Functions of a stock exchange cont’d
Provides a physical location for buying and selling securities that have been listed for trading on that exchange
Role and Functions of a stock exchange cont’d
Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules
Role and Functions of Role and Functions of
a stock exchange a stock exchange cont’dcont’d
The exchange itself does not buy or sell the securities, nor does it set prices for them
FairFair
The exchange assures The exchange assures that no investor will have that no investor will have an undue advantage over an undue advantage over other market participantsother market participants
Efficient marketEfficient market
This means that orders This means that orders are executed and are executed and transactions are settled transactions are settled in the fastest possible in the fastest possible wayway
TransparencyTransparency
Investor make informed Investor make informed and intelligent decision and intelligent decision about the particular stock about the particular stock based on informationbased on information
Transparency cont’d Transparency cont’d
Listed companies must Listed companies must disclose information in disclose information in timely, complete and timely, complete and accurate manner to the accurate manner to the Exchange and the public Exchange and the public on a regular basison a regular basis
Transparency cont’dTransparency cont’d
Required information include Required information include stock price, corporate stock price, corporate conditions and developments conditions and developments dividend, mergers and joint dividend, mergers and joint ventures, and management ventures, and management changes etcchanges etc
Doing businessDoing business
People who buy or sell stock on an exchange do so through a broker
Doing business cont’dDoing business cont’d
The broker takes your order to the floor of the exchange looks for a broker representing someone wanting to buy/sell
• If a mutually agreeable price is found the trade is made
Some type of orders Some type of orders • Limit order Limit order • Market order Market order • Day order Day order • Open Open • All or noneAll or none• Any partAny part• Good through Good through
PricePrice
At any point in time, the price of previously issued stock is determined by the ebb and flow of supply and demand
Listing requirementsListing requirements
There are specific There are specific requirements for allowing a requirements for allowing a public company to list its public company to list its securities on the Stock securities on the Stock Exchange these are set out Exchange these are set out in the legislationin the legislation
Benefits of listing
• Visibility• Market support• Investors confidence
• Increased demand for products and services
• Overall increase in profitability
Once tradedOnce traded
• Aura of reliabilityAura of reliability• Accuracy in reporting Accuracy in reporting
financial data financial data • Reputation Reputation • Strength Strength
Delisting Stock exchange can delist companies for a number of reasons including :-• Merger with another company • Solvency problems • Name change company asked to be
removed • Failure to comply with exchange rules
Desirable Characteristics of a stock market
Liquidity
Ability to sell an asset quickly at a fairly known price Low transactions costs
Desirable Characteristics of a stock market cont’d
• Availability of information Market efficiency
• Prices react quickly to new information
• Small price fluctuations • Narrow price spread
Financing the exchange Financing the exchange
• Transaction fees paid by members for Transaction fees paid by members for each order executed each order executed
• Fees paid by firms when their securities Fees paid by firms when their securities are originally listed are originally listed
• Annual fees by firms Annual fees by firms • Entrance fees from new members Entrance fees from new members • sale of historic trading and market sale of historic trading and market
information information
Major challenges for the Major challenges for the ExchangesExchanges
• Cross border trading • Issuers and investors are
expanding their horizons beyond their home markets
• Investors becoming much more demanding
•Regulatory improvementRegulatory improvementTransparency and Corporate Transparency and Corporate GovernanceGovernance
CorporateGovernance
Protection to minorityShareholders
Disclosure
Enhance market
confidence
Strong industry regulator
Owners
Board of Directors
Managers
Ownership of the company is by the public in the form of shares one share, one vote
Board is elected by shareholders to represent the best interests of the owners
Board hires and fires the management of the company