FINANCIAL MATTERS CORNER BY JOSEPH KUTIALO MWANZO © 2015

WHAT DO YOU KNOW ABOUT STOCK MARKET?

What is a Stock Market?

• A stock market is a place where securities are traded.

• The securities traded are issued by listed companies and by the government; the aim is to raise funds for different

purpose such as development and expansion.

• Common securities traded on a stock exchange include company shares (bonds), treasury bills, Government bonds,

debentures and commercial papers.

• The forces of demand and supply prevail in the stock market to determine the prices of securities Traded hence the

stock exchange is a free market.

NAIROBI STOCK EXCHANGE

Nairobi Stock Exchange (NSE) is the only market of its kind in Kenya and the securities traded in it include Shares

and bonds. Plans are under way to introduce more products.

CENTRAL DEPOSITORY & SETTLEMENT CORPORATION (CDSC)

CDSC: Is an associate company of the NSE. CDSC was incorporated under the Companies Act and approved by

Capital Markets Authority (CMA) to facilitate the holding of securities in electronic accounts called Central

Depository Accounts (CDA), through its central Depository Systems (CDS).

ROLES OF THE STOCK EXCHANGE IN THE ECONOMY

The stock exchange plays a central role in the economic development of any country. In any case the analysis of the

performance of the economy is based on then indicators of the stock exchange.

The major roles of the Nairobi Stock Exchange encompass:

• Promotes a culture of saving.

• Assists in the transfer of savings to productive sectors. Savings should be accompanied with established

mechanisms for channeling the resources into activities that create wealth.

• The NSE enhances the development of financial markets.

• Facilitates efficient allocation of capital, which is a scarce resource. Systems have to be developed to ensure capital

goes to the most deserving user.

• Stock markets promote higher standards of accounting, resource management and transparency in the management

of business. The separation of the owners of capital from the managers is important because we recognize that

people who have the money may not necessarily have the best business ideas, and people with the best ideas may

not have the money. Nairobi Stock Exchange becomes the all-important link between the investors and the owners

of finance.

• Stock exchange improves the access to finance of different types of users by providing the flexibility for

customization. This is made possible as the financial sector allows the different users of capital to raise capital in

ways that are suited to meeting their specific needs. For example, established companies can raise short term finance

through commercial paper; small companies can raise long term capital by selling shares; the Government and even

municipal councils can raise funds by floating various types of bonds as an alternative to foreign borrowing.

• Nairobi Stock Exchange provides investors with an efficient mechanism to liquidate their investments in securities.

The very fact that investors are certain of the possibility of selling out what they hold, as and when they want, is a

major incentive for investment as it guarantees mobility of capital in the purchase of assets.

• Less general benefits which stock exchanges afford individuals, corporations and even the Government, include: -

The growth of related financial services sector e.g. insurance, pension and provident fund schemes that nurture the

spirit of savings. - The check against capital flight that takes place because of local inflation and currency

depreciation among others .The establishment of an efficient stock market is, therefore, indispensable for any

economy that is keen on using scarce capital resources to achieve economic growth.