Stock Exchange


Stock exchange is the market to buy and sell shares (other than issued by merchant banks) debentures and government securities (bonds).  Stock exchange enables the savers to use their saved income to a more productive process.  Since the liability of the shareholders of limited companies are limited to the extent of their invested capital.  There is no risk of losing their private property.
After the issue of shares the shares are bought and sold in stock exchange. The main functions of stock exchanges are
1)  It helps the government and companies to borrow on a long term basis – Shares carry no date for repayment, it means that they are permanent loans.  Debentures and government securities are for many years. Sometimes people want to get their money back, but companies or government cannot pay their money back. Stock exchange allows people sell their shares or other securities at any time to get their money back.
2) It influences the way in which savings are invested – It is a free market. Prices of shares of successful companies will tend to rise as their demand increases. The opposite will happen to the companies performing badly. These movements in share prices will influence the way in which the savings are invested.
3) It provides a means of valuing financial assets – It is very difficult to measure the value of wealth in forms other than money.  The price of shares, debentures and government securities sold on stock exchange are published daily so it is easy to find their present value.
The traditional way of buying and selling on stock exchange is different from the present day.   Only members can trade in the stock exchange.  Stock exchange members are of two kinds – stock brokers and Jobbers.  Stock brokers take orders from clients who wish to buy or sell shares, carry out the business and charge a commission for their services.  Jobbers also known as market makers do not deal directly with the public.  They buy and sell from stock brokers and act as a wholesaler. They earn an income by adjusting the price according to the demand and supply.
Share price index reveals the performance of the company. This index provide an up-to-date summary of the market price of shares [FTSE 100 – Index of best 100 UK companies, Dow-Jones index of New York stock exchange, Nikkei index of Tokyo stock exchange in Japan etc.] Newspapers and magazine which cover financial news also will show the trends over a number of days and weeks, both in relation to the shares of particular companies and in terms of specific indices.
It is possible for individuals and financial institutions to make money on the stock market by guessing which way shares price are likely to move in the future. Attempting to make money from buying and selling shares in the hope that their prices will change is called Speculation.
There are three kinds of speculation.  
People and firms who buy shares in the hope that there price will rise so that they can sell them at a profit are called Bulls.  When prices are rising in general, that market situation is called Bullish. 
People and firms who sell shares in the hope that their price will fall so that they can buy them back later at much lower price are called Bears. When share prices are falling the stock marketer is called Bearish. [Bears buy shares at falling prices because they believe that their prices will rise in long run] 
People and firms who apply to buy up newly issued shares in the hope that their price will rise quickly after dealing begins are called Stags
Most of the share trading carried out on the stock exchange now a day is done using share information presented on computer screens around the world connected via internet.    Buyers and sellers place their orders on the “Computer Order book”, stating which shares and at what price they wish to buy or sell. If the computer system finds a match between buying and selling prices, it will carry out transaction automatically on screen without anyone having to match up the buyers and sellers. This has greatly increased the speed and efficiency of the share market.  Share prices are displayed on a continuously updated computer database called Stock Exchange Automated Quotation (SEAQ).  A customer can place four types of order in the Electronic dealing system.  A limit – customers place the number of shares and price at which they wish to buy or sell.  If computer find matches, the order is carried out. If not it remains on the order book for a given period of time, after which it is deleted if no match is made.  At best – Customers enter their orders and agree to buy at the best price available on the system immediately. Fill or kill – These orders are carried out immediately or rejected by the system if a price matches cannot be found. Execute and eliminate – It is like “at best” order, except that limits are placed on the price range. 
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