Commerce Keypoints: Stock Exchange; This study material is suitable for students sitting for the following exams: JAMB, WAEC, NECO, GCE, IJMB, and JUPEB. Stock exchanges are the epicenters of financial markets, where investors and companies converge to buy and sell securities.
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In this in-depth article, we’ll uncover the intricacies of stock exchanges, delving into their importance, functions, the types of securities traded, transaction procedures, and the Second-Tier Securities Market.
Commerce Keypoints: Stock Exchange
By the end of this journey, you’ll have a profound understanding of the world of stock exchanges.
i) Importance and Functions of Stock Exchanges
Stock exchanges play a pivotal role in the financial landscape for various reasons:
- Capital Formation: They provide companies with access to funds through the issuance of stocks and bonds, enabling them to finance business operations and expansion.
- Liquidity: Stock exchanges offer a secondary market where investors can easily buy and sell securities, ensuring liquidity and price transparency.
- Price Discovery: Stock prices are determined by the forces of supply and demand, providing real-time information on a company’s valuation.
- Investor Protection: Regulatory bodies oversee stock exchanges to protect investors by enforcing rules and regulations.
- Wealth Creation: Stock ownership allows individuals to participate in a company’s growth and share in its profits.
ii) Types of Securities
Stock exchanges facilitate the trading of various securities:
- Stocks: Also known as equities, stocks represent ownership in a company, entitling shareholders to dividends and voting rights.
- Shares: Shares are similar to stocks but may have different terms or classes, such as common shares and preferred shares.
- Bonds: Bonds are debt securities issued by governments or corporations. They pay periodic interest and return the principal amount at maturity.
- Debentures: Debentures are unsecured debt instruments, meaning they lack collateral. They are backed by the issuer’s creditworthiness.
iii) Procedure of Transactions and Speculations
Stock exchange transactions involve the following steps:
- Order Placement: Investors place buy or sell orders through brokers or online platforms.
- Order Matching: The stock exchange matches buy and sell orders based on price and time.
- Trade Execution: Upon matching, the trade is executed, and ownership of securities transfers.
- Clearance and Settlement: Clearinghouses handle the financial aspects, ensuring that securities and funds are exchanged.
- Record Keeping: Stock exchanges maintain records of trades, which are publicly available.
Speculation involves predicting price movements to profit from buying low and selling high. It often entails a high level of risk and is not suitable for all investors.
iv) Second-Tier Securities Market
The Second-Tier Securities Market, also known as the Alternative Securities Market (ASEM), provides a platform for smaller and emerging companies. Its main components include:
- Listing Requirements: ASEM has less stringent listing requirements compared to the main board, making it accessible to smaller firms.
- Types of Companies for ASEM: Emerging companies, small and medium-sized enterprises (SMEs), and those that may not meet the main board’s criteria find a home on ASEM.
- Advantages of ASEM: ASEM offers these companies access to capital and visibility. It is a stepping stone for growth and progression to the main board.
- Operating Regulations: ASEM operates under specific regulations designed to support its unique market segment.
FAQs – Answers in Depth
i) State the Importance and Functions of the Stock Exchange: Stock exchanges are vital for capital formation, liquidity, price discovery, investor protection, and wealth creation.
ii) Identify the Different Securities Traded on the Stock Exchange: Securities include stocks, shares, bonds, and debentures.
iii) Analyse the Procedure of Transactions and Speculations on the Stock Exchange: Transactions involve order placement, matching, execution, clearance, settlement, and record-keeping. Speculation is a strategy of predicting price movements.
iv) Appraise the Advantages and Operating Regulations of the Market: ASEM provides opportunities for smaller companies to access capital and visibility, with less stringent listing requirements and specific operating regulations tailored to its market segment.
