A stock exchange is a market where securities are sold and bought, by securities in this definition we meant shares, stock, debentures and bonds. Bonds are of two types, these are Joint stock bonds and government bonds. Government bonds are called gilt-edged securities.
Kinds of Securities
The kinds of securities sold and bought in the stock exchange market are as follows:
1. Stock: Stock is the capital of a company which can be broken up into individual shares, debentures and bonds.
2. Shares: A share is the smallest unit of capital issued for sale by joint-stock companies. The face value of a share is very small such as #1, #2, #5 and #10. Shares are of different kinds, (ordinary shares, preference shares, etc).
3. Debentures: These are loan certificates issued by joint-stock companies. Those who bought them are known as debenture holders. Debenture holders are creditors to the company. They are therefore paid a fixed rates of interest by the company.
4. Bonds: These are loan certificates with a fixed rate of interest. Most of them are redeemable at fixed future date. They can be issued by reputable public companies or by the government.
5. Government Bonds: These are also referred to as gilt-edged securities. They are seen as very good type of investment because they are issued by the government which had enormous resources and therefore cannot fail. Gilt-edged securities are usually for a short period of time such as three or six months. That is they are redeemed after three or six months. Government uses them to borrow money from members of the public when it is short of funds. They carry a rate of interest higher than that paid by commercial banks on savings and fixed deposit accounts.
Procedures of Transactions In the Stock Exchange
It is only those registered as members of a stock exchange that carry out business on the floor of the stock exchang market.
Below are the registered members of the stock Exchange and the procedure for their business.
1. Brokers: These are agents of the public who want to sell or buy securities. Between their client and the jobber man who want to buy or sell the particular securities which their clients is interested in. The broker is paid a commissioned for his service. Brokers deal with all types of securities.
2. Jobber: A jobber is a seller as well as buyer of securities. Each Jobber specializes in some types of securities. Unlike the broker he does not deal with members of the public. He deals only with the brokers. The profit which the jobber receives from purchase and sale of securities is known as the Jobber’s turn.
3. Authorized Clerks: These are employees of jobbers and brokers. The authorized clerks are regarded as members of the stock exchange and as such can carry out business on the floor of the stock exchange in the interest of their masters.
4. Unauthorized Clerks: These are clerks who do minor and routine clerical work for jobbers and brokers. They are not registered as members of the stock exchange and therefore cannot carry out business on the floor of the stock exchange.
5. The Stock Exchange Council: The administration of the stock exchange is in the hands of the Stock Exchange Council. This council is made up of a number of members known as deputies and headed by a chairman.
Procedure For Stock Exchange Transactions:
It is the duty of brokers to contact members of the public who want to sell or buy securities. Once the brokers has got a client he will approach a jobber who specializes in that type of security. He will ask the jobber to quote his prices without revealing to him whether he wants to buy or sell. The jobber will then quote the two prices. That is the price he want to sell and the price he wants to buy. (The Jobber’s selling price is always higher than his buying price).
If the broker is pleased with his price he (the broker) will then reveal to him whether he wants to buy or sell and the quantity.
Two documents will then be prepared. These are known as contract note and transfer form.
The contract note will contain information such as the name and headquarter address of the company that issued out the shares, the number of shares bought and the amount paid for them.
The transfer form must be completed and signed by both the jobber and the customer. The completed form together with the old share certificate are then sent to the company that issued out the shares. On receipt of this the name of the company will cancel the old certificate and issue a new one in the name of the new holder and send this to him.
Quoting Share Prices
There are basically two ways of quoting the prices of shares on the stock exchange and there are Ex-Div and Cum Div.
Ex Div: When the price of shares are quoted Ex-Div it means that whoever buys them will not receive the next dividend. In other words the next dividend belongs to the former owner. It is only after this that the new owner will start receiving dividends.
Cum Div: A share quoted Cum Div means that the new owner will receive the next dividend.
Types Of Speculators In the Stock Exchange
There are three types of speculators as follows:
1. Bear: This is a speculator who sells securities in the hope that their prices will fall in the near future.
2. Bull: This is a speculator who buys securities in the hope that their prices will rise in the near future.
3. Stag: This is a speculator who buys newly-issued securities in the hope that their prices will be higher when they will be sold and bought on the floor of Stock Exchange.
Functions and Importance of the Stock Exchange
1. The issuing Houses use stock exchange prices as a guiding when fixing price of the new issues of shares and other securities.
2. The Stock Exchange guarantees easy resale of old securities. And easy resale of security encourages the public to buy to raise huge and capital easily through the issue of new share and debentures.
3. Prices and Securities are moderated through the work of then stock.