The role of stock exchange as a market for securities

Business studies study module

DEFINATIONS

  • Stock: a group of shares in a public limited company

-Stocks are formed when all the authorized shares in a particular category have been issued and fully paid for.

  • Stock exchange market: is a market where stocks from Quoted companies are bought and sold

-Stock exchange markets enable share holders in public companies to sell their shares to other people, usually members of the public interested in buying them.

  • A Quoted Company: is a company that has been registered (listed) as a member of the stock exchange market.

-Companies that are not quoted cannot have their shares traded in the stock exchange market.

  • Securities: this could either refer shares or documents used in support of share ownership.
  • Initial Public Offer (I. P. O): refers to situations in which a company has floated new shares for public subscription ( Has advertised new shares and has invited members of the public to buy them.
  • Secondary market: The market that deals in second hand shares i.e. the transfer of shares from one person or organization to another.

There is only one stock exchange market in Kenya i.e. The Nairobi Stock Exchange.

A person wishing to acquire shares will do so either at an IPO or in the secondary market. However, an investor cannot buy or sell stocks directly in the stock exchange market. They can only do so through stock brokers.

ROLES OF THE STOCK EXCHANGE MARKET

  • Facilitates buying of shares- it provides a conducive environment to investors who want to buy shares in different companies.
  • Facilitates selling of shares- it creates a market for those who wish to sell their shares.
  • Safeguarding investors’ interests- it monitors the performance of the already quoted companies and those found not meeting expectations are struck off. Companies who want to be quoted must also attain a certain standard of performance.
  • Provides useful information- it provides timely, accurate and reliable information to investors which enable them to make decisions on the investments to make. The information is passed on through mass media and stock brokers.
  • Assist companies to raise capital- it assists companies to raise capital creating an environment through which companies issue new shares to members of the public in an IPO.
  • Creation of employment- it creates employment for those who facilitate the buying and selling of shares eg stock brokers, stock agents etc.
  • Raising revenue for the government- the government earns revenue collecting fees and other levies/ dues from activities carried out in the stock exchange market.
  • Availing a variety of securities- it avails a variety of securities from which an investor can choose from. The market therefore satisfies needs of various investors eg investors who wish to buy from different companies can do so in the market.
  • Fixing of prices- the stock exchange market is in a position to determine the true market value of the securities through the forces of demand and supply. This is of great importance to both the buyer and the seller.
  • Measures a country’s economic progress- the performance of securities in the stock exchange market may be an indicator of a country’s economic progress e.g a constant rise in prices and volumes of securities traded within a given period of time would indicate that the country’s economy is positively growing.
  • Promotes the culture of saving- it provides investors with opportunities to channel their excess funds. Such people act as role models to other members of the society who may emulate them therepromoting a saving culture.



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