CHAPTER 10
STOCK EXCHANGE
Stock exchange, securities exchange, or bourse is a facility where stockbrokers and traders can buy and
sell securities, such as shares of stock and bonds and other financial instruments. Stock exchanges may
also provide facilities for the issue and redemption of such securities and instruments and capital events
including the payment of income and dividends. Securities traded on a stock exchange include stock
issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock
exchanges often function as "continuous auction" markets with buyers and sellers consummating
transactions via open outcry at a central location such as the floor of the exchange or by using an
electronic trading platform.
To be able to trade a security on a certain stock exchange, the security must be listed there. Usually, there
is a central location at least for record keeping, but trade is increasingly less linked to a physical place, as
modern markets use electronic communication networks, which give them advantages of increased speed
and reduced cost of transactions. Trade on an exchange is restricted to brokers who are members of the
exchange. In recent years, various other trading venues, such as electronic communication networks,
alternative trading systems and "dark pools" have taken much of the trading activity away from traditional
stock exchanges.
Initial public offerings of stocks and bonds to investors is done in the primary market and subsequent
trading is done in the secondary market. A stock exchange is often the most important component of a
stock market. Supply and demand in stock markets are driven by various factors that, as in all free
markets, affect the price of stocks.
There is usually no obligation for stock to be issued through the stock exchange itself, nor must stock be
subsequently traded on an exchange. Such trading may be off exchange or over-the-counter. This is the
usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global
securities market. Stock exchanges also serve an economic function in providing liquidity to shareholders
in providing an efficient means of disposing of shares.
Role of stock exchanges
Stock exchanges have multiple roles in the economy. This may include the following:
i). Raising capital for businesses
Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of
credit or a loan, a stock exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public.
Capital intensive companies, particularly high tech companies, always need to raise high volumes of
capital in their early stages. For this reason, the public market provided by the stock exchanges has been
one of the most important funding sources for many capital intensive startups.
Alternatives to stock exchanges for raising capital; Research and Development limited partnerships,
Venture capital, Corporate partners and mobilizing savings for investment
ii). Facilitating acquisitions
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels,
hedge against volatility, increase their market share, or acquire other necessary business assets. A
takeover bid or mergers and acquisitions through the stock market is one of the simplest and most
common ways for a company to grow by acquisition or fusion.
iii). Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary
middle-class family, through dividends and stock price increases that may result in capital gains, share in
the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for
shareholders.
iv). Corporate governance
COMMERCE COURSE NOTES CHAPTER 10 – STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 1
, By having a wide and varied scope of owners, companies generally tend to improve management
standards and efficiency to satisfy the demands of these shareholders and the more stringent rules for
public corporations imposed by public stock exchanges and the government. This improvement can be
attributed in some cases to the price mechanism exerted through shares of stock, wherein the price of the
stock falls when management is considered poor (making the firm vulnerable to a takeover by new
management) or rises when management is doing well (making the firm less vulnerable to a takeover). In
addition, publicly listed shares are subject to greater transparency so that investors can make informed
decisions about a purchase. Consequently, it is alleged that public companies (companies that are owned
by shareholders who are members of the general public and trade shares on public exchanges) tend to
have better management records than privately held companies (those companies where shares are not
publicly traded, often owned by the company founders, their families and heirs, or otherwise by a small
group of investors).
v). Many banks and companies worldwide utilize securities identification numbers (ISIN) to identify,
uniquely, their stocks, bonds and other securities. Adding an ISIN code helps to distinctly identify
securities and the ISIN system is used worldwide by funds, companies, and governments.
However, when poor financial, ethical or managerial records become public, stock investors tend to lose
money as the stock and the companies tend to lose value. In the stock exchanges, shareholders of
underperforming firms are often penalized by significant share price decline, and they tend as well to
dismiss incompetent management teams.
vi). Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the
large and small stock investors as minimum investment amounts are minimal. Therefore, the stock
exchange provides the opportunity for small investors to own shares of the same companies as large
investors.
vii). Government capital-raising for development projects
Governments at various levels may decide to borrow money to finance infrastructure projects such as
sewage and water treatment works or housing estates by selling another category of securities known as
bonds. These bonds can be raised through the stock exchange whereby members of the public buy them,
thus loaning money to the government. The issuance of such bonds can obviate, in the short term, direct
taxation of citizens to finance development—though by securing such bonds with the full faith and credit
of the government instead of with collateral, the government must eventually tax citizens or otherwise
raise additional funds to make any regular coupon payments and refund the principal when the bonds
mature.
viii). Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share prices tend
to rise or remain stable when companies and the economy in general show signs of stability and growth.
A recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore, the
movement of share prices and in general of the stock indexes can be an indicator of the general trend in
the economy.
Listing requirements to the stock exchange market
Each stock exchange imposes its own listing requirements upon companies that want to be listed on that
exchange. Such conditions may include minimum number of shares outstanding, minimum market
capitalization, and minimum annual income.
Stock exchange Ownership
Stock exchanges originated as mutual organizations, owned by its member stockbrokers. However, the
major stock exchanges have demutualized, where the members sell their shares in an initial public
offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock
exchange.
COMMERCE COURSE NOTES CHAPTER 10 – STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 2
STOCK EXCHANGE
Stock exchange, securities exchange, or bourse is a facility where stockbrokers and traders can buy and
sell securities, such as shares of stock and bonds and other financial instruments. Stock exchanges may
also provide facilities for the issue and redemption of such securities and instruments and capital events
including the payment of income and dividends. Securities traded on a stock exchange include stock
issued by listed companies, unit trusts, derivatives, pooled investment products and bonds. Stock
exchanges often function as "continuous auction" markets with buyers and sellers consummating
transactions via open outcry at a central location such as the floor of the exchange or by using an
electronic trading platform.
To be able to trade a security on a certain stock exchange, the security must be listed there. Usually, there
is a central location at least for record keeping, but trade is increasingly less linked to a physical place, as
modern markets use electronic communication networks, which give them advantages of increased speed
and reduced cost of transactions. Trade on an exchange is restricted to brokers who are members of the
exchange. In recent years, various other trading venues, such as electronic communication networks,
alternative trading systems and "dark pools" have taken much of the trading activity away from traditional
stock exchanges.
Initial public offerings of stocks and bonds to investors is done in the primary market and subsequent
trading is done in the secondary market. A stock exchange is often the most important component of a
stock market. Supply and demand in stock markets are driven by various factors that, as in all free
markets, affect the price of stocks.
There is usually no obligation for stock to be issued through the stock exchange itself, nor must stock be
subsequently traded on an exchange. Such trading may be off exchange or over-the-counter. This is the
usual way that derivatives and bonds are traded. Increasingly, stock exchanges are part of a global
securities market. Stock exchanges also serve an economic function in providing liquidity to shareholders
in providing an efficient means of disposing of shares.
Role of stock exchanges
Stock exchanges have multiple roles in the economy. This may include the following:
i). Raising capital for businesses
Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of
credit or a loan, a stock exchange provides companies with the facility to raise capital for expansion
through selling shares to the investing public.
Capital intensive companies, particularly high tech companies, always need to raise high volumes of
capital in their early stages. For this reason, the public market provided by the stock exchanges has been
one of the most important funding sources for many capital intensive startups.
Alternatives to stock exchanges for raising capital; Research and Development limited partnerships,
Venture capital, Corporate partners and mobilizing savings for investment
ii). Facilitating acquisitions
Companies view acquisitions as an opportunity to expand product lines, increase distribution channels,
hedge against volatility, increase their market share, or acquire other necessary business assets. A
takeover bid or mergers and acquisitions through the stock market is one of the simplest and most
common ways for a company to grow by acquisition or fusion.
iii). Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an ordinary
middle-class family, through dividends and stock price increases that may result in capital gains, share in
the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for
shareholders.
iv). Corporate governance
COMMERCE COURSE NOTES CHAPTER 10 – STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 1
, By having a wide and varied scope of owners, companies generally tend to improve management
standards and efficiency to satisfy the demands of these shareholders and the more stringent rules for
public corporations imposed by public stock exchanges and the government. This improvement can be
attributed in some cases to the price mechanism exerted through shares of stock, wherein the price of the
stock falls when management is considered poor (making the firm vulnerable to a takeover by new
management) or rises when management is doing well (making the firm less vulnerable to a takeover). In
addition, publicly listed shares are subject to greater transparency so that investors can make informed
decisions about a purchase. Consequently, it is alleged that public companies (companies that are owned
by shareholders who are members of the general public and trade shares on public exchanges) tend to
have better management records than privately held companies (those companies where shares are not
publicly traded, often owned by the company founders, their families and heirs, or otherwise by a small
group of investors).
v). Many banks and companies worldwide utilize securities identification numbers (ISIN) to identify,
uniquely, their stocks, bonds and other securities. Adding an ISIN code helps to distinctly identify
securities and the ISIN system is used worldwide by funds, companies, and governments.
However, when poor financial, ethical or managerial records become public, stock investors tend to lose
money as the stock and the companies tend to lose value. In the stock exchanges, shareholders of
underperforming firms are often penalized by significant share price decline, and they tend as well to
dismiss incompetent management teams.
vi). Creating investment opportunities for small investors
As opposed to other businesses that require huge capital outlay, investing in shares is open to both the
large and small stock investors as minimum investment amounts are minimal. Therefore, the stock
exchange provides the opportunity for small investors to own shares of the same companies as large
investors.
vii). Government capital-raising for development projects
Governments at various levels may decide to borrow money to finance infrastructure projects such as
sewage and water treatment works or housing estates by selling another category of securities known as
bonds. These bonds can be raised through the stock exchange whereby members of the public buy them,
thus loaning money to the government. The issuance of such bonds can obviate, in the short term, direct
taxation of citizens to finance development—though by securing such bonds with the full faith and credit
of the government instead of with collateral, the government must eventually tax citizens or otherwise
raise additional funds to make any regular coupon payments and refund the principal when the bonds
mature.
viii). Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share prices tend
to rise or remain stable when companies and the economy in general show signs of stability and growth.
A recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore, the
movement of share prices and in general of the stock indexes can be an indicator of the general trend in
the economy.
Listing requirements to the stock exchange market
Each stock exchange imposes its own listing requirements upon companies that want to be listed on that
exchange. Such conditions may include minimum number of shares outstanding, minimum market
capitalization, and minimum annual income.
Stock exchange Ownership
Stock exchanges originated as mutual organizations, owned by its member stockbrokers. However, the
major stock exchanges have demutualized, where the members sell their shares in an initial public
offering. In this way the mutual organization becomes a corporation, with shares that are listed on a stock
exchange.
COMMERCE COURSE NOTES CHAPTER 10 – STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 2
