WHAT IS A STOCK EXCHANGE? A Stock Exchange is an organized market in securities (shares, stocks and bonds). Individuals and companies can buy shares of companies through Licensed Dealing Members (Stockbrokers) of the Stock Exchange and hence, become part-owners or shareholders of these companies. Similarly, individuals or companies through Stockbrokers can buy stocks and bonds of other companies and the Government, and become lenders to or creditors of these companies or the Government. Any individual or company who at one time or the other lent money or bought shares through the Stock Exchange can also sell back the relevant shares or stocks through the Stock Exchange at any time. Since the Stock Exchange is an organized market, it has rules and regulations which govern it. These rules and regulations are designed to protect all market participants, including the individual who puts up some funds to invest.
WHAT ARE SECURITIES? Securities are financial instruments or legal documents signifying either an ownership position in a company (i.e. shares) or a creditor relationship with a company or Government (i.e. stocks and bonds).
WHATARE STOCKS, BONDS AND SHARES? Stocks and bonds are long-term fixed interest bearing securities issued by Government and companies. When one invests in stocks and bonds, one gets interest income which is paid periodically until the loan matures or is called back by the issuer. The holder of stocks and bonds gets interest even if the issuer does not make a profit. Shares represent part-ownership in a business concern. Shareholders, therefore, among them, own the company, have votes in how its affairs are run and if the company makes profit, they are entitled to a share of it However, the dividend which shareholders receive is dependent on the company's profitability and management decisions. How to Buy and Sell shares
WHY IS THE STOCK EXCHANGE IMPORTANT IN AN ECONOMY? When you own a small business and want to expand, you may be able to do this from the profits you have been making. Or, you may go to your bank or fall on friends for help. Many large businesses, however, need funds for expansion far in excess of what can be provided from their profits or from private sources of capital. When a new factory or machinery costs millions of pounds, it might be impossible to meet such expenses from past profits earned by the company. Furthermore, the prospects of a major business raising huge sums from friends are negligible. Generally also, banks are not keen on providing sufficient funds on a long term basis, though banks will normally provide short-term finance. Large businesses with cash needs for expansion have their best prospects when they turn to the Stock Exchange. Through the Stock Exchange, such businesses can turn to the public at large and invite the public to lend them cash or take a share in the business and by implication, a share in future profits. In this way, companies can tap the savings of every person in the country in order to obtain the long-term capital that may not be available from their own resources or from their bankers. The Government also undertakes a lot of investment in roads, hospitals, electricity, water, telephones etc. The Government often has to borrow money to finance such major capital spending. To procure the necessary funds from the investing public, the Government can also go through the Stock Exchange. The Stock Exchange is thus a vital link between Companies or the Government with capital needs, and the public with savings to invest. Through investment in shares, investors become part- owners of the companies of their choice. Companies which raise capital from the issue of shares or stocks are able to expand their services, replace equipment and develop new products. This increases employment and incomes both directly and indirectly. More goods and services come to the market, and as more people are employed and have more money to buy, the overall economy thrives.
WHO ARE THE OWNERS OF THE STOCK EXCHANGE? The Stock Exchange has no owners (shareholders) as such but the Exchange, which is incorporated as a public company limited by guarantee, has members who are either corporate bodies or individuals who have contributed to the promotion of the Exchange. There are two categories of members, namely Licensed Dealing Members and Associate Members. A Licensed Dealing Member is a corporate body licensed by the Exchange to deal in listed securities. How to buy and sell shares An Associate Member is an individual or corporate body which has satisfied the Exchange's membership requirements but is not licensed to deal in securities.
WHO IS AN INVESTOR? An investor is a person or an institution who uses his savings or borrowings to buy securities.
WHAT DOES AN INVESTOR GAIN BY BUYING SHARES, STOCKS, BONDS, ETC.? By purchasing shares of listed companies on the Stock Exchange, investors become part-owners of the companies and thereby gain: dividend income which is the company's distributed profit to shareholders. Sometimes bonus shares which are additional shares distributed freely to existing shareholders. Possible capital gains when sale of shares is effected. the right to vote at shareholders' meetings. .share certificates which are accepted as collateral by banks. .sometimes a 'rights issue' which is a new issue for cash to existing shareholders in proportion to their holdings usually at a preferential price. .Investment in stocks and bonds, on the other hand, gives the investor fixed rates of interest periodically until the loan Matures or is called back by the issuer.
HOW DOES ONE BUY OR SELL SECURITIES ON THE STOCK EXCHANGE? Securities are bought and sold on the Stock Exchange through Licensed Dealing Members also known as Stockbrokers. A Licensed Dealing Member or stockbroker is a firm which buys and sells securities on behalf of investors for a brokerage fee or commission. When trading is in listed securities, the stockbroker must be a Licensed Dealing Member of the LSE. An investor cannot personally come to the Stock Exchange to buy shares, stocks, etc., but can only buy them through the stockbrokers. Stockbrokers, apart from buying and selling securities on behalf of clients, also advise clients on the mix or portfolio of investments (shares, stocks etc.) and provide functional services such as vaults for the safe-keeping of securities for clients. They also give up-to-date information about securities to their clients. To buy securities, the potential investor must first contact a stockbroker. Once a stockbroker is chosen, the potential investor must decide on the kinds of securities that are of interest to him. The stockbroker will then recommend the shares and stocks which are suitable for his needs, assuming the stockbroker is given the option to make recommendations. After making a decision on the securities to buy, the stockbroker buys the securities at the most advantageous price obtainable at the time of dealing on the trading floor. On completion of the deal, in the case of shares, for instance, the stockbroker sends to the buyer a Contract Note, showing the date of the transaction, the number of shares purchased, the price per share, the commission chargeable, and stamp, if any. The final figure will show how much is payable to the stockbroker on receipt of the Contract Note. When the transaction is completed, a share certificate is issued to the buyer. The procedure for selling securities is similar to buying but the total amount on the Contract Note shows the sale proceeds payable by the stockbroker to the seller excluding commissions and any charges How to Buy and Sell Shares. |
