The Stock Market Continues...

How a Stock Exchange Works

Stock exchanges are not open to the general public.

If you want to buy/ sell shares, you need to contact a dealer (broker) that is a member of a stock exchange.

Banks now offer this service, too. You can also buy and sell shares over the

Internet through online brokers and banks.

How a Stock Exchange Works

Trading in the financial markets can broadly be split into two groups:

Business-to-business (B2B) trading. This is often conducted on exchanges between large investment banks and brokers trade directly with each other. It often involves large amounts of securities.

How a Stock Exchange Works

Business-to-consumer (B2C) trading. Individuals buy and sell relatively small amounts of stocks and shares. Other institutional clients (e.g. hedge funds, fund managers or insurance companies, trading far larger amounts of securities) buy and sell from brokers or "dealers", who act as middle-men between the clients and the B2B markets.

How a Stock Exchange Works

Brokers will buy and sell shares for a fee known as commission.

Example: You want to buy 1,000 shares in

Google at no more than $10 a share.

You and your broker will

agree on a commission of

1% of the total cost of the

shares to be paid to the

broker for undertaking the work.

How a Stock Exchange Works The broker will attempt to buy shares in

Google at the lowest possible price from other firms of brokers called market makers who place an order on a stock exchange's computerized share-dealing system.

Market makers are special brokers or dealers who create the market in shares. They are always willing to buy and sell shares with other brokers or dealers. They buy at a low price and sell at a high price to make a profit.

Motto: Buy low, sell high.

Share Price Indices

Share prices are affected by supply and demand like any other products.

If a company is not making profits, the shareholders will not get a good dividend. Hence, they might sell their shares. As a result, there are too many of the company's shares in the market and nobody wants to buy them, thereby driving the price of the share down.

Share Price Indices

If a company is making profits, the shareholders will get a good dividend. Hence, they will not want sell their shares. As a result, people who want to buy the company's shares will have to pay higher prices for the shares.

Changes in the market prices of shares can reveal much about how well different companies are performing.

Share Price Indices

Investors in shares can watch how share prices are changing over time by monitoring the prices of shares in individual companies or by tracking a share price index.

E.g. S&P Global tracks the average price of shares traded in 100 of the largest MNCs that are traded on different stock exchanges around the world.

Share Price Indices

Most share price indices are national indices. A national index tracks the average prices of

shares traded on one or more of a country's stock exchanges.

Example: The Dow Jones Industrial Average Index provides an up-to-date average market price on the NYSE of the shares in 30 of the largest and most widely held public companies in the USA.

Share Price Indices

Most regularly quoted stock market indices include the following:

The S&P 500 Index in the US The French CAC 40 The German DAX The Japanese Nikkei 525 See Handout

Speculating on Changes in Share Prices

Speculation: attempting to make money from buying and selling shares in the hope their prices will change.

Motto: Do not put all your eggs in the same basket.

Speculating on Changes in Share Prices

Bulls: people and firms who buy shares in the hope their price will rise so that they can sell them at a profit.

Bullish: the stock market

is bullish if share prices

are rising in general.

Speculating on Changes in Share Prices

Bears: people and firms who sell shares in the hope their price will fall so that they can buy them back later at much lower prices.

Bear market: when share prices are falling the stock market is called a bear market.

People buy the shares back despite the falling prices because they believe the prices will rise again the long run and that dividend payments from company profits could be good.

Speculating on Changes in Share Prices

Stags: people and firms who apply to buy up newly issued shares in the hope their price will rise quickly after dealing begins.

Listed Companies Not all companies can issue shares of stock. In many countries, the government require that

companies register before being allowed to issue and trade shares on exchanges.

After they have been approved, they can then issue and sell shares. They are then known as listed (quoted) companies.

Listed Companies In some countries, a listed company may also

be allowed to trade debt securities rather than shares on some type of exchange or market.

Example of a debt security is municipal bond issues, various types of collateralized securities, or even government bonds.