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Economics

THE STOCK EXCHANGE MARKET

THE STOCK EXCHANGE MARKET

The stock exchange market is a highly organised capital market which provides facilities for the buying and selling of securities such as shares, stocks, debentures and government bonds.

The stock exchange is principally concerned with the creation of market for second-hand securities. E.g. The Nigerian Stock Exchange which was incorporated in 1960.

The principal dealers in the Stock Exchange are the Brokers and Jobbers. Brokers act as agents of individuals or firms wish to sell or buy securities. The public does not operate directly in the Stock Exchange.

The brokers sell and buy securities on behalf of their clients or customers. They charge commission for performing these services.

The Jobbers are the main dealers in stocks and shares and other forms of securities.

They transact business with brokers and have no direct dealing with the public. They have two prices: a lower price for buying and a higher price for selling.

FUNCTIONS OF THE STOCK EXCHANGE

  1. The stock exchange provides a market for the buying and selling of long-term financial securities.
  2. The stock exchange helps in raising capital for development
  3. It provides employment opportunities to workers in the Stock Exchange especially brokers and jobbers.
  4. The stock exchange offers investment opportunities to those with a small capital base.
  5. The stock exchange helps existing investors to sell or transfer their shares to other people who wish to buy them

The difference between primary and secondary capital markets

The difference between the primary capital market and the secondary capital market is that in the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors’ trade securities among themselves, and the company with the security being traded does not participate in the transaction.

When a company publicly sells new stocks and bonds for the first time, it does so on the primary capital market. In many cases, this takes the form of an initial public offering, or IPO. When investors purchase securities on the primary capital market, the company offering the securities has already hired an underwriting firm to review the offering and created a prospectus outlining the price and other details of the securities to be issued.

Companies issuing securities via the primary capital market hire investment bankers to obtain commitments from large institutional investors to purchase the securities when first offered. Small investors are not often able to purchase securities at this point, because the company and its investment bankers seek to sell all of the available securities in a short period of time to meet the required volume and must focus on marketing the sale to large investors who can buy more securities at once. Marketing the sale to investors can often include a “road show” or “dog and pony show,” in which investment bankers and the company’s leadership travel to meet with potential investors and convince them of the value of the security being issued.

The secondary market is where securities are traded after the company has sold all the stocks and bonds offered on the primary market. Markets such as the New York Stock Exchange (NYSE), London Stock Exchange or Nasdaq are secondary markets. On the secondary market, small investors have a better chance of buying or selling securities, because they are no longer excluded from IPOs due to the small amount of money they represent. Anyone can purchase securities on the secondary market as long as they are willing to pay the price for which the security is being traded.

On the secondary market, an investor requires a broker to purchase the securities on his or her behalf. The price of the security fluctuates with the market, and the cost to the investor includes the commission paid to the broker. The volume of securities sold also varies from day to day, as demand for the security fluctuates. The price paid by the investor is no longer directly related to the initial price of the security as determined by the first issuance, and the company that issued the security is not a party to any sale between two investors. However, the company can engage in a stock buyback on the secondary market.

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