Have you ever wondered how the Stock Exchange and Stocks & Shares worked? In these pages you will find learn all you need to know about the Stock Exchange and Stocks & Shares.
A Stock Exchange is a market place where govenments and comapnies seeking money can come together with investors.
The investors will invest their money with the govenment, normally in return for a fixed interest rate. They will invest their money in companies, normally in return for a share in the ownership of the company, or a fixed interest rate.
These securities are generally referred to as stocks and shares, and can be divided into five groups:
- Joint-stock (stocks, shares, debentures)
- Government securities
- Local Govenment sccurities
- Foreign Government securities
- Securities of foreign companies
The main function of a Stock Exchange is to act as a market for securities. In acting thus it performs a variety of functions which are vital to the development of economic activity in a nation.
- Marketability. The general public and indeed all investors would be much less willing to invest their capital in either government securities or business units (joint stock), if they were unable to realise them when they wished. In providing them an organised market where stocks and shares can be easily bought and sold, as an investor wishes, it makes for greater participation in financing of both government and industrial activities.
- Optimum portfolio. Because of the ease in purchasing or selling securities, investors can sell securities which they do not require, as they no longer give them the security, liquidity or return on capital which they require, and reinvest in more attractive ones.
- The existance of an active market ensures that the price of securities is well known and one can judge the performance of a company by the movements in the price of its shares and the frequency of transactions in these shares.
- Savings are channelled into investment which benefits the economy as a whole. Money itself will not benefit the holder except as stored purchasing power; therefore persons with surplus capital can put it to work until they require it.
- Optimum use of scarce resources: The demand for capital will be reflected by the price offered in the form of dividends. More efficient firms will have better return on capital invested and therefore find it easier to find additional financing.
- A Stock Exchange has much influence on the terms of new issues of capital and the rules and regulations of the Stock Exchange serve to protect teh investing public.
- Without the existence of Stock Exchanges it would be more difficult for Central Banks to regulate the monetary policies of countries, as Open Market operations would not be possible.
Members of the London Stock Exchange are bound by the rules and regulations of the Stock Exchange, which ensures the integrity of the market and thereby inspires investor confidence.
Prior to 1986 the important members of London Stock Exchange were stockbrokers (brokers) and stockjobbers (jobbers). Stockjobbers specialised in certain types of shares, and traded on their own behalf. Their aim was to sell shares at a higher price that they purchased, and the difference was their profit and was known as the 'jobbers turn'. Stockbrokers were more general dealers, who acted on instructions of non-members, i.e. he bought and sold on their behalf. For this service, he took a commission, known as the 'brokerage'. What was interesting about this arrangement was that brokers and jobbers had different and seperate jobs, and were prohibited from carrying out both functions.
The London Stock Exchange had a reorganisation in 1986, dubbed the Big Bang, and the role of the jobber and broker was 'blurred'. Also, comanies could now become members, rather than individuals as was the case up to this point. As a result, there was an explosion of share dealing companies, often offshoots of banks etc.
This had two major effects, a primary effect and a knock-on effect. First, there was more access to the floor and trading, and the investment companies were able to also act on behalf of customers. This led to the knock on effect of greater competition and more publicity, and which led to enhanced market interraction of ordinary members of the public, via the investment & share dealing comapnies.
It is via these share dealing companies that we, members of the public access the markets today. As we have come to expect in highly competitive markets, there are a range of offers available from the various share dealers - based around commission, flat fee or a combination of both.
There are a number of advantages to firms to be quoted on a Stock Exchange, including the following.
- Robust financial structure: In countries with low Stock Exchange activity there is an over reliance on financing by means of commercial loans and overdrafts etc.
- Realistic valuation: The share price is a continious and transparent barometer of a company's worth. This gives confidence to investors and allows managment to guage their own performance.
- Publicity: The constant publicity which these companies receive in market reports, financial reporting and press comments helps to create greater customer identification with the company and its products.
- Participation: Customers, employees and indeed anyone who wishes, can engage in the operation of the comapny to some extent by obtaining a shareholding in the company. Offering employees preferential rates on shares encourages them to participate, and in turn will have a positive impact on their interests, concens and efforts in their own jobs.
Individuals wishing to purchase shares can do so by using the services of a broker, normally available through the high street banks, over the phone or via the internet.
Brokers offer a range of services that fall within the boundaries of the following:
- Full advisory & execution broker service. Comprehensive service suitable if you wish to have a hassle free investment in the markets. The broker will look at your personal circumstances and select suitable investments for you, execute those investments, monitor and manage the investment and sell your investmant when you wish to liquidate.
- Execution only broker service. If you can research your own potential investmants and monitor them etc, this service may suit you best. The brokers will take simple buy and sell instructions from you and execute them accordingly.
As mentioned, there will be a range of in-between service levels offered by most brokerages. Brokers will charge you commission for their services. Generally speaking, the more comprehensive services will cost more.
Appointing a Broker
Generally speaking, finding a suitable broker will be determined by your investment needs, but you should consider the following:
- Quality of information. Although execution only brokers may be informed about many shares, they are not licenced to offer advice. However, most of them will compliment their services with a range of tools and information points such as websites to help you monitor and manage your investments.
- Speed of execution. Even though you may lodge instructions with your broker by phone and internet etc, you must bear in mind that it takes time for the broker to execute your instructions. He has a legal obligation to 'settled' within 3 days, which is known as T+3, but many will offer faster services.
- Markets available. Some brokers will operate on one Stock Exchange, others will operate on a number of exchanges. Clearly, this has direct implications for you, the investor.
- Cost. As with all financial services, the rates charged can vairy greatly. The cost of brokers services should be compared in light of the three criterial listed above.
- Tools. The availability of online monitoring and presentation tools is a must for the serious investor. Many brokers provide such tools. However, the quality of these tools is instrumantal in their value.