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STOCK EXCHANGE/SECURITIES MARKET

A stock exchange is a type of exchange that allows traders to buy and sell stocks as well as
company statutory stock.
When people talk about buying and selling stock, they mean they have bought or sold one or
more shares of a particular stock.
Shares/equites/stocks are terms used to describe units of ownership in one or more companies.
The owner is known as shareholder.

Common terminologies used in stock exchange

1. Buy-This means buying or taking a position in a company.
2. Sell-Getting rid of the shares as you have achieved your goal or want to cut down losses.
3. Ask-It is what people who are looking to sell their stocks and looking to get their shares.
4. Bid-Amount people are willing to pay for a stock.
5. Ask bid spread-Spread is the difference between what people want to spend and what
people want to get.
6. Bull-This is a market condition where the investors are expecting prices to rise.
7. Bear-This is a market condition where investors are expecting prices to fall.
8. Market order-This is a type of order which executes as quickly as possible at the market
price.
9. Day order-Direction to a broker to execute a trade, at a specific price that expires at the
end of the trading date if it is not complicated.
10. Volatility-How fast a stock market moves up or down.
11. Capitalization-This is what the market thins the company value is.
12. Authorized shares-This is the total number of shares that a company can trade.
13. Dividend-This is the portion of the company earnings which is paid to the share holders.
14. Broker-A person who buys or sells shares on behalf of the client for a commission.
15. Portfolio-A collection of investments owned by a shareholder.
16. Going long- Betting on stock price will increase so that you can buy low and sell high.
17. Blue chips-They are well established and financially sound companies which hold a record
of consistently increasing rate of paying dividends over years to its shareholders.
18. Cum rights-This allows share holder of record to subscribe to a right offering declared to a
company.
19. Gilt edged securities-These are high grade investment bonds offered by government and
large corporations as a method of borrowing funds.

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How does stock exchange market works?

Stock market/Securities exchange is made up of many traders and investors who are willing to
buy and sell stock. The transaction starts when the buyer and seller start trading the stock. The
prices of the stocks rise and falls based on the demand and supply for those stocks.

Functions of stock exchange/Securities market

1. Determining the security prices.
Based on valuation of securities, investors and traders can assess and determine the security
that will give them most returns on investments.
2. Maintaining liquidity.
As securities can easily be sold and bought on an exchange, there is high probability of
converting them into cash. This allows investors to stay confident about trading the stock
exchange market.
3. Economic state barometer
Stock exchange can very effectively indicate the economic state of the country. Traders
can therefore identify the industries that are growing and that are seeing a downfall.
4. Facilitating investments
Stock exchange functions according to the guidelines of regulatory bodies. Due to the
presence of a regulatory body, investors and traders cultivates a culture of investments since
greater amounts of profits can be earned through trading in the stock exchange.
5. Raising capital
By an increase in security prices, companies can raise capital to fund their business
operations and projects. Many companies can even come back from losses by raising capital
from traders from the stock exchange.
6. Building a healthy economy
Investors and companies are in an equal chance of profits as well as losses.
7. Providing rights to investors
Through the stock exchange, traders invest in equity shares which enable them to have
voting rights.
8. Attracting foreign investments
Stock exchange attracts funds from foreign entries through investors. This increases the
influx of the capital within the national market which in turn increases the opportunity to
earn more.

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Parties involved in stock exchange market

1. Stock brokers
A stock broker is a financial professional who executes orders in the market on behalf of his
clients. Many stock brokers work for a brokerage firm and handle transactions for a number of
individuals and institutional customers. Stock brokers earn a commission and serve as
intermediaries. Stock brokers are also known as registered representative or investment
advisor.

Functions of stock brokers

1. Buying-A stock broker buys stock on behalf of the client.
2. Selling-A stock broker sells stocks on behalf of a client.
3. Client’s advisor-A stock broker advises clients on investment strategies based on market
conditions.
4. Managing the investment portfolio of an investor.
5. Stock brokers follow the latest trends and news in the market.
6. Recommending clients about potential investment opportunities available in the stock
market.

2. Stock jobbers
These are special agents of exchange securities market that entail bulk trading of securities
with brokers to get profits it in the stock market.
Types of jobbers in the stock exchange market
1. Bulls
This is a jobber who buys securities in low prices; hold them in the hope of selling them
when the prices rise hence making profits. Bulls leads to upward movement of prices of
securities in the market a condition known as bullish.
2. Bears
This is a jobber who believes in selling securities when they feel their prices will decrease
to make profits. This condition makes security market bearish and the economy struggles
during this phase.
3. Stages
They are stock market jobbers and working in primarily market, buy new securities offered
for trading to the public in belief that those securities get undervalued.

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Functions of jobbers in the security exchange market

1. A jobber purchases securities directly from the security exchange firm.
2. A jobber studies a security market very well.
3. Jobbers are interested in profits not commissions.
4. Ensures the prices of the security the buy is the lowest as the must make deals with
brokers to make profit.
5. Helps the security market to sell their securities.
6. A jobber is a market maker.
7. Determines when prices will increase and when they will decrease.

Similarities between and stock jobbers and stock brokers

1. Both operate in securities market.
2. Both do not hold shares for investment purposes
3. Both are regulated by the rules of the securities market.

Differences between Stock jobbers and stock brokers

1. A jobber buys and sells securities in his own name while a broker is an agent who deals
with buying and selling securities on behalf of his client.
2. A jobber deals with the broker in trading whole a broker carries trade with the jobber on
behalf of his investors.
3. A jobber is prohibited to buy or sell securities in the stock exchange while acts as link
between the jobber and the investors.
4. A jobber is a special mercantile agent while a broker is a general mercantile agent.
5. A jobber gets consideration in the form of profit while a broker gets consideration in the
form of commission or brokerage.

Types of company shares

Ordinary shares- These are standard shares with no special rights or restrictions. They have
the highest financial gain potential but also have highest risk.
Ordinary shareholders are entitled to voting rights. The last is paid if the company is wound up.

Non Voting ordinary shares- They carry the same conditions as ordinary shares except with
regards to voting rights. The shareholders may have voting rights under certain circumstances
or may have no voting rights at all.

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Preference shares-carry a right that gives the holder preferential treatment when annual
dividends are distributed to shareholders. Shares receive fixed dividend. That is, the
shareholder will not benefit from company’s increased profits.
Preference shares carry no voting rights.

Cumulative preference shares-These they give holders right to carry forward a dividend to
successive years in case it cannot be paid in one year.
Dividends must be paid despite earning levels of the business provided that the company has
profits that can be distributed.

Redeemable shares-These come with an agreement that the company can buy them back at a
future date. A company cannot issue only redeemable shares , they must ensure that they issue
non redeemable shares.

What is a quotation in security exchange market?

Quotation is consent by the security exchange for companies’ shares to be dealt with in the
securities market. That is to be bought and sold to the securities market.

Reasons that may make a company seek quotation from security exchange market/
Advantages
 A quoted company is able to raise finances quickly and easily.
 A quoted company is considered to be financially stable.
 A quoted company can easily obtain loans.
 A quoted company can compare itself with other quoted companies.
 Quoted companies are forced to operate within certain guidelines.

Reasons that may make a company reluctant to seek quotation from security exchange
market/ Disadvantages.
 The company looses its secrecy through the publication of their shares. Inspections of the
books of accounts by the shareholders or the public leads to loss of secrecy too.
 Loss of control of incoming shareholders-The company directors guide day to day
activities of a quoted company.
 It is expensive due to fees payable to the stock market.

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 Formalities of quotation are tedious and tiresome.

 Immediately after quotation the prices are likely to be low due to over or under subscription
of shares.
 A quoted company can easily be taken over by people buying shares in the stock exchange.

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