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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