A stock exchange is a specialized market where investors can buy and sell existing securities like shares, stocks, debentures and gill edge securities. It is a part of the capital market.
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FUNCTIONS (IMPORTANCE) OF THE STOCK EXCHANGE
- It is a market for buying and selling of hand securities.
- it assists companies to raise capital
- It determines the value (prices) of shares, stock and other securities on a daily basis.
- The prices of shares quoted on the stock exchange serve as economic indicator.
- It assists the government in raising funds e.g. through development stock.
- It protects investors from any form of fraud.
- It helps to raise the administrative standard of companies by improving financial management and accounting information.
- It provides employment for brokers, jobbers, clerks etc.
- It provides information to investors and also involved in investors education.
- It provides yardstick for measuring performance of companies.
OPERATORS AT THE STOCK EXCHANGE
Members operating at the stock exchange are
- Brokers (Stockbrokers)
- Authorized clerk
TYPES OF SECURITIES DEALT IN AT THE STOCK EXCHANGE
- Gilt-edge securities – These are securities issued by the government. This type of securities is very safe as government cannot default (i.e. fail to pay its debts). They are therefore regarded as being risk – free investment.
- Describe each of the following (a) Stockbrokers (b) Issuing Houses (c) Securities
- Write short notes on the followings; (a) capital market (b) money market
SPECULATORS AT THE STOCK EXCHANGE
- BULL: This is a speculator who buys securities with the hope that the price will rise and that he will sell at higher price for a gain.
- BEAR: This is a speculator who sells securities hoping that the price will fall so that he can buy them at lower prices later and thereby make a profit.
- STAG: This is a speculator who buys new issues direct from a public limited company in the hope that the shares or stocks will be in great demand once they are quoted on the stock exchange a few days later. The stag hopes to make profit after selling.
METHODS OF ACHIEVING QUOTATION OF SHARE AT THE STOCK EXCHANGE
- Offer for sale
- Offer for subscription
THE SECOND – TIER SECURITIES MARKET
Small and medium sized companies are usually unable to fulfil all the conditions required for a conventional listing on the Stock Exchange.
Therefore an alternative – The Second – Tier market with less stringent conditions and the entry requirements was introduced to enable such companies raise funds through the capital market.
The SSM is an alternative market created to provide for the buying and the selling of securities issued by small and medium sized companies who are unable to meet the requirements for quotation on the main Stock Exchange.
TERMINOLOGIES CONNECTED WITH THE STOCK EXCHANGE
- BLUE CHIPS: These are the best industrial shares associated with large nationally known companies. They give a safe and reliable return (e.g. dividends) and has growth potentials in terms of share price appreciation and dividend income.
- RIGHT ISSUE: This is an offer of new shares to existing shareholders of a company who must pay for the additional shares being subscribed.
- CUM – DIV (i.e. Cum Dividend) – Meaning including dividend or with dividend – that is, the purchaser of a stock termed “cum div” will be entitled to dividend when due.
- EX DIV (i.e. Ex Dividend) – Meaning the purchaser of a stock with such a term will not be entitled to dividend.
- Explain five Securities traded on the Stock Exchange
- What is the importance of Stock Exchange to the economic growth of Nigeria?
Essential Commerce for SSS by O.A. Longe Page 202 – 209.
- A person that buys shares hoping to resell at higher price is called a (a) bull (b) bear (c) stag (d) broker
- In a stock exchange transaction, the buyer is NOT entitled to the dividend when the stock is quoted (a) clean (b) ex-dividend (c) double barreled (d) cum – dividend
- Any member of the public who wants to buy shares at the stock market will first of all meet a/an (a) agent (b) broker (c) jobber (d) shareholder
- Government securities are described as gilt – edge because they are (a) issued under tight security (b) owned by public corporation (c) traded on the stock exchange (d) regarded as safe to invest in.
- When shares are sold cum-div, it means the (a) holder is entitled dividend (b) holder cannot resell it. (c) stockbroker is entitled to the dividend (d) dividend is fixed
- List four securities traded on the stock exchange.
- What is the second- Tier securities market?
GENERAL EVALUATION QUESTIONS
- Distinguish between Authorized Capital and Called-Up Capital
- State five characteristics of a limited liability company
- List five advantages of after-sales services
- List and explain three types of life assurance policies
- Explain three types of accounts that are operated in a commercial bank