CHAPTER 5
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.
The Role of Stock Exchange as a Market for Securities
Definitions
1. Stock: a group of shares in a public limited company, Stocks are formed when all the
authorized shares in a particular category have been issued and fully paid for.
2. Stock exchange market: is a market where stocks from Quoted companies are bought
and sold, Stock exchange markets enable shareholders in public companies to sell their
shares to other people, usually members of the public interested in buying them.
3. A Quoted Company: is a company that has been registered (listed) as a member of the
stock exchange market. Companies that are not quoted cannot have their shares traded in
the stock exchange market.
4. Securities: this could either refer shares or documents used in support of share
ownership.
5. Initial Public Offer (I. P. O): refers to situations in which a company has floated new
shares for public subscription ( Has advertised new shares and has invited members of the
public to buy them.
6. Secondary market: The market that deals in second hand shares i.e. the transfer of
shares from one person or organization to another.
COMMERCE II COURSE NOTES CHAPTER 5 –STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 1
, There is only one stock exchange market in Kenya i.e. The Nairobi Stock Exchange.
A person wishing to acquire shares will do so either at an IPO or in the secondary market.
However, an investor cannot buy or sell stocks directly in the stock exchange market. They can
only do so through stock brokers.
Roles of the Stock Exchange Market
1. Facilitates buying of shares- it provides a conducive environment to investors who want
to buy shares in different companies.
2. Facilitates selling of shares- it creates a market for those who wish to sell their shares.
3. Safeguarding investors’ interests- it monitors the performance of the already quoted
companies and those found not meeting expectations are struck off. Companies who want
to be quoted must also attain a certain standard of performance.
4. Provides useful information- it provides timely, accurate and reliable information to
investors which enable them to make decisions on the investments to make. The
information is passed on through mass media and stock brokers.
5. Assist companies to raise capital- it assists companies to raise capital by creating an
environment through which companies issue new shares to members of the public in an
IPO.
6. Creation of employment- it creates employment for those who facilitate the buying and
selling of shares eg stock brokers, stock agents etc.
7. Raising revenue for the government- the government earns revenue by collecting fees
and other levies/ dues from activities carried out in the stock exchange market.
8. Availing a variety of securities- it avails a variety of securities from which an investor
can choose from. The market therefore satisfies needs of various investors eg investors
who wish to buy from different companies can do so in the market.
9. Fixing of prices- the stock exchange market is in a position to determine the true market
value of the securities through the forces of demand and supply. This is of great
importance to both the buyer and the seller.
10. Measures a country’s economic progress- the performance of securities in the stock
exchange market may be an indicator of a country’s economic progress e.g a constant rise
in prices and volumes of securities traded within a given period of time would indicate
that the country’s economy is positively growing.
11. Promotes the culture of saving- it provides investors with opportunities to channel their
excess funds. Such people act as role models to other members of the society who may
emulate them thereby promoting a saving culture.
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.
COMMERCE II COURSE NOTES CHAPTER 5 –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.
The Role of Stock Exchange as a Market for Securities
Definitions
1. Stock: a group of shares in a public limited company, Stocks are formed when all the
authorized shares in a particular category have been issued and fully paid for.
2. Stock exchange market: is a market where stocks from Quoted companies are bought
and sold, Stock exchange markets enable shareholders in public companies to sell their
shares to other people, usually members of the public interested in buying them.
3. A Quoted Company: is a company that has been registered (listed) as a member of the
stock exchange market. Companies that are not quoted cannot have their shares traded in
the stock exchange market.
4. Securities: this could either refer shares or documents used in support of share
ownership.
5. Initial Public Offer (I. P. O): refers to situations in which a company has floated new
shares for public subscription ( Has advertised new shares and has invited members of the
public to buy them.
6. Secondary market: The market that deals in second hand shares i.e. the transfer of
shares from one person or organization to another.
COMMERCE II COURSE NOTES CHAPTER 5 –STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 1
, There is only one stock exchange market in Kenya i.e. The Nairobi Stock Exchange.
A person wishing to acquire shares will do so either at an IPO or in the secondary market.
However, an investor cannot buy or sell stocks directly in the stock exchange market. They can
only do so through stock brokers.
Roles of the Stock Exchange Market
1. Facilitates buying of shares- it provides a conducive environment to investors who want
to buy shares in different companies.
2. Facilitates selling of shares- it creates a market for those who wish to sell their shares.
3. Safeguarding investors’ interests- it monitors the performance of the already quoted
companies and those found not meeting expectations are struck off. Companies who want
to be quoted must also attain a certain standard of performance.
4. Provides useful information- it provides timely, accurate and reliable information to
investors which enable them to make decisions on the investments to make. The
information is passed on through mass media and stock brokers.
5. Assist companies to raise capital- it assists companies to raise capital by creating an
environment through which companies issue new shares to members of the public in an
IPO.
6. Creation of employment- it creates employment for those who facilitate the buying and
selling of shares eg stock brokers, stock agents etc.
7. Raising revenue for the government- the government earns revenue by collecting fees
and other levies/ dues from activities carried out in the stock exchange market.
8. Availing a variety of securities- it avails a variety of securities from which an investor
can choose from. The market therefore satisfies needs of various investors eg investors
who wish to buy from different companies can do so in the market.
9. Fixing of prices- the stock exchange market is in a position to determine the true market
value of the securities through the forces of demand and supply. This is of great
importance to both the buyer and the seller.
10. Measures a country’s economic progress- the performance of securities in the stock
exchange market may be an indicator of a country’s economic progress e.g a constant rise
in prices and volumes of securities traded within a given period of time would indicate
that the country’s economy is positively growing.
11. Promotes the culture of saving- it provides investors with opportunities to channel their
excess funds. Such people act as role models to other members of the society who may
emulate them thereby promoting a saving culture.
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.
COMMERCE II COURSE NOTES CHAPTER 5 –STOCK EXCHANGE PREPARED BY MR. ANTONY AMBIA Page 2
