The Role and The Role and Function of a Stock Function of a Stock

ExchangeExchange

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OutlineOutline

• Overview of financial Overview of financial markets markets

• Institutional infrastructure Institutional infrastructure • Role and functions of stock Role and functions of stock

exchangeexchange

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OverviewOverview of of Financial Financial Markets Markets

• Two types of financial markets • Money markets• Capital markets

• Primary market • Secondary market

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The Hierarchy of Markets

Money market

Government bond market

Corporate bonds & equities

Asset backed securities & derivatives

Gov’t T Bills

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Financial Market

Money market Capital market

Primary market Second

ary market

Commercial banks

Firms raise capital

Investors trade securities issued in primary market

debt

equity

Public Private placement

Short term instruments

Primary Mkt Inst

Stock exchange

Credit unions

Insurance cos

NIS

Supporting

agents

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Market infrastructureMarket infrastructure

• Stock exchange Stock exchange • Clearing and settlementClearing and settlement• Education and training Education and training • Investors’ protection Investors’ protection • Rating agencyRating agency

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InstrumentsInstruments•Equities Equities

•Bonds Bonds

Most popular investing instruments

Stocks and shares

Bonus issues

Rights issues

Corporate Government

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Intermediaries Intermediaries

• Brokerage houses Brokerage houses

• Stock brokers Stock brokers • Advisors Advisors

Hand in Hand Beharry stockbrokers Trust company GuyAmerica

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Regulation & SupervisionRegulation & Supervision

A A few questions few questions • Ever wondered how the capital Ever wondered how the capital

markets workmarkets work• Who sets the rulesWho sets the rules• What does the stock exchange doWhat does the stock exchange do• What is the role of the stock brokerWhat is the role of the stock broker• How to become a registered broker How to become a registered broker

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The Regulator

• Foremost authority presiding over the capital markets

• With mission to promote and maintain Fair, efficient , secure and transparent market and to facilitate the orderly development of the stock exchange

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Role and Functions of Role and Functions of a stock exchange a stock exchange

Established for the Established for the purpose of assisting, purpose of assisting, regulating and controlling regulating and controlling business of buying, business of buying, selling and dealing in selling and dealing in securities securities

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Role and Functions of Role and Functions of a stock exchange cont’d a stock exchange cont’d

• Provides a market for the trading of Provides a market for the trading of securities to individuals and securities to individuals and organizations seeking to invest organizations seeking to invest their saving or excess funds their saving or excess funds through the purchase of securitiesthrough the purchase of securities

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Role and Functions of a stock exchange cont’d

Provides a physical location for buying and selling securities that have been listed for trading on that exchange

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Role and Functions of a stock exchange cont’d

Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules

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Role and Functions of Role and Functions of

a stock exchange a stock exchange cont’dcont’d

The exchange itself does not buy or sell the securities, nor does it set prices for them

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FairFair

The exchange assures The exchange assures that no investor will have that no investor will have an undue advantage over an undue advantage over other market participantsother market participants

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Efficient marketEfficient market

This means that orders This means that orders are executed and are executed and transactions are settled transactions are settled in the fastest possible in the fastest possible wayway

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TransparencyTransparency

Investor make informed Investor make informed and intelligent decision and intelligent decision about the particular stock about the particular stock based on informationbased on information

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Transparency cont’d Transparency cont’d

Listed companies must Listed companies must disclose information in disclose information in timely, complete and timely, complete and accurate manner to the accurate manner to the Exchange and the public Exchange and the public on a regular basison a regular basis

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Transparency cont’dTransparency cont’d

Required information include Required information include stock price, corporate stock price, corporate conditions and developments conditions and developments dividend, mergers and joint dividend, mergers and joint ventures, and management ventures, and management changes etcchanges etc

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Doing businessDoing business

People who buy or sell stock on an exchange do so through a broker

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Doing business cont’dDoing business cont’d

The broker takes your order to the floor of the exchange looks for a broker representing someone wanting to buy/sell

• If a mutually agreeable price is found the trade is made

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Some type of orders Some type of orders • Limit order Limit order • Market order Market order • Day order Day order • Open Open • All or noneAll or none• Any partAny part• Good through Good through

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PricePrice

At any point in time, the price of previously issued stock is determined by the ebb and flow of supply and demand

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Listing requirementsListing requirements

There are specific There are specific requirements for allowing a requirements for allowing a public company to list its public company to list its securities on the Stock securities on the Stock Exchange these are set out Exchange these are set out in the legislationin the legislation

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Benefits of listing

• Visibility• Market support• Investors confidence

• Increased demand for products and services

• Overall increase in profitability

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Once tradedOnce traded

• Aura of reliabilityAura of reliability• Accuracy in reporting Accuracy in reporting

financial data financial data • Reputation Reputation • Strength Strength

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Delisting Stock exchange can delist companies for a number of reasons including :-• Merger with another company • Solvency problems • Name change company asked to be

removed • Failure to comply with exchange rules

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Desirable Characteristics of a stock market

Liquidity

Ability to sell an asset quickly at a fairly known price Low transactions costs

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Desirable Characteristics of a stock market cont’d

• Availability of information Market efficiency

• Prices react quickly to new information

• Small price fluctuations • Narrow price spread

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Financing the exchange Financing the exchange

• Transaction fees paid by members for Transaction fees paid by members for each order executed each order executed

• Fees paid by firms when their Fees paid by firms when their securities are originally listed securities are originally listed

• Annual fees by firms Annual fees by firms • Entrance fees from new members Entrance fees from new members • sale of historic trading and market sale of historic trading and market

information information

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Major challenges for the Major challenges for the ExchangesExchanges

• Cross border trading • Issuers and investors are

expanding their horizons beyond their home markets

• Investors becoming much more demanding

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•Regulatory improvementRegulatory improvementTransparency and Corporate Transparency and Corporate GovernanceGovernance

CorporateGovernance

Protection to minorityShareholders

Disclosure

Enhance market

confidence

Strong industry regulator

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Owners

Board of Directors

Managers

Ownership of the company is by the public in the form of shares one share, one vote

Board is elected by shareholders to represent the best interests of the owners

Board hires and fires the management of the company

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Kinds of BrokersKinds of Brokers

Commission BrokerCommission Broker JobberJobber Floor brokerFloor broker TaraniwallaaTaraniwallaa Odd lot dealerOdd lot dealer BudliwallaBudliwalla ArbitrageurArbitrageur Security dealersSecurity dealers

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