To be really successful, it is said, you need to have your fundamentals strong.
But how many of us actually sit down and try to find answers to basic questions on whatever we are interested in? For example, of investors in the stock markets, how many actually know what a stock exchange is, how did it come into being and what is its importance.
Everyday, stocks are exchanged and traded in numerous stock markets across the world. The liquidity they bring in is a vital component of economic growth. However, we seldom give the role of stock exchange any thought.
This article provides some basic information about stock markets.
What is a stock exchange?
A stock exchange is a corporation or an organisation which provides 'trading' facilities for stock brokers and traders to trade stocks and other securities. The securities traded on a stock exchange include: shares issued by companies, unit trusts, derivatives, pooled investment products and bonds.
Simply put, stock exchanges are open markets that trade financial assets. Whether associated with a company or acting as an individual, a stock exchange is the place where stocks are bought and sold.
There are a number of major stock exchanges around the world and each of these plays a part in determining the overall condition of any economy.
Which were the first stock exchanges?
The first stock exchanges were started in Netherlands when the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. Slowly, stock exchanges opened in London and in New York.
What is the role of a stock exchange which makes it vital to an economy?
The main function of a stock exchange is to facilitate the transactions associated with both the buying and selling of securities. Buyers and sellers of shares and stocks can track the price changes of securities from the stock markets (derivatives, equity etc.) in which they operate.
Also, stock exchanges have multiple roles in an economy which make it vital. These include:
Raising capital for businesses
Mobilising savings for investment
Facilitating company growth
Creating investment opportunities for small investors
Government capital-raising for development projects
Barometer of the economy
How does a stock exchange operate?
With the help of stockbrokers, the buyers and sellers participating in a stock market carry out their transactions. The brokers representing selling parties take their orders to the stock exchange floor and then find brokers representing parties willing to invest in similar stocks. If both parties agree to trade at the fixed price, the transaction takes place.
What are the requirements to trade in a stock exchange?
Companies have to meet the requirements of the exchange in order to have their stocks and shares listed and traded. These requirements vary from exchange to exchange. However, the common necessity for a security to be traded on a certain stock exchange, it has to be listed there. Trade on any exchange can be done by members only.
In India, Bombay Stock Exchange, which is the oldest Stock Exchange in Asia located in Dalal Street, has requirements for a minimum market capitalisation of Rs 250 million and minimum public float equivalent to Rs.100 Million.
What are the benefits and drawbacks of listing your company on a stock exchange?
Going public is not an easy task. In deciding whether to seek a listing, a company should consider the alternative financing needs available and the benefits versus the drawbacks of listings.
- Creating a market for the company's shares
- Enhancing the status and financial standing of the company
- Increasing public awareness and public interest in the company and its products
- Providing the company with an opportunity to implement share option schemes for their employees
- Accessing additional fund-raising in the future by means of new issues of shares or other securities
- Facilitating acquisition opportunities by use of the company's shares
- Offering existing shareholders a ready means of realizing their investments
While there are benefits to going public, it also means additional obligations and on the companies and its directors:
Increasing accountability to public shareholders
Need to maintain dividend and profit growth trends
Becoming more vulnerable to an unwelcome takeover
Need to observe and adhere strictly to the rules and regulations by governing bodies
Increasing costs in complying with higher level of reporting requirements
Relinquishing some control of the company following the public offering
Suffering a loss of privacy as a result of media interest
Image: The New York Stock Exchange