Stock Market functioning
Function financial markets, functions stock exchange market, functions nigerian stock exchange
It is interesting to know as to how Stock market works. It is better
o strat from the basics. A company requires funds to get started, it requires
capital. There are 2 ways of raising capital. First is by way of borrowing
money which can be later paid back. Second is by allotting stocks to those,
who asre interested in sharing the company’s profit. What this means is
people who have purchased company’s stock will help in company’s venture,
in return company will share its profit with them. When a company issue
stocks it is saved from the double burden of Interest and repayment of
loan and company can raise more funds too. Shareholders get a say in the
company policies and they also share the ownership of the company.
Basics of stock market
• Stock: The company’s ownership units are known as stock.
• Stock price: The specific stock sells at specific price
which is called the stock price. These prices get influenced by the state
of economy, trend in trading & spending. The Technical and financial
report realeased by the company also effect the share prices.
• Offered price: The price that is printed in the final
prospectus at the time it was issued is known as offering price.
• Underwriter: An investment banker is hired to sell
the stocks.This process is known as underwriting and the person hired
is known as the underwriter. He acts like a mediater between the stock
issuing company and the public. The underwriting process works in one
of the underlying ways:
1. Best arrangement efforts: The investment banker tries to sell as many
issues as possible at the prevailing market price.
2. Arrangement of All-or-none : Incase the investment banker fails to
sell all shares issued previously to him , the company withdraws the issue.
3. Negotiated Underwriting: The terms of issue and price are negotiated
between the issuing company and the issuer.
4. Strong Commitment: All the shares are purchased by the underwriter
from the company and he sells it to the public.
5. Competitive bids are opted by the company from Investment bankers and
the top bidder is appointed as their underwriter.
Prospectus: It is a legal detailed document that presents
the financial report about the issuing company. A prospectus shows the
offered price, the other investment costs, the background of the company
, the management memebers, legal feedback about the issue, underwriting
procedure and the SEC’s disclaimers. Prospectuses are received by all
who are interested in the primary offering. Before purchasing any offering
one should read them carefully.
• Broker-Dealer : Broker is a person who promotes trade
between customers. He is at no risk , he works on commission. A Dealer
is a person who trades for his own securities and for securities of others.
He anticipates some risk in the transactions. Authorised brokers and dealers
should be registered with the National Association of Securities Dealers
and follow the guidelines set by the association.
• Stock market Index: To measure the stock market in
complete perspective stock market index plays important role. Financial
firms combine the indices and measure the portfolio’s performance.
• Market capitalization: The value at which the stock
is offered. The value includes the total outstanding shares of the company
and their price.
• Bull market: This is a trend characterized by the investor’s
confidence in anticipation of future capital gains. A popular example
of a bull market was one which formed in 1990s when there was a tremendous
growth in US and other financial markets.
• Bear market: This is when investors take to selling
anticipation a losses. This type of situation creates pessimism in the
market. Early period of 1930 that marked the onset of great depression
is a popular example of bear market.
Insight of the stock market functioning
A company needs to file registration statements with the Securities and
Exchange Commission when it decides to sell the stocks in the market.
The wait ing period after filing registration is 20 days. A final prospectus
is released which contains offering price of the stock. The company sells
all the shares to the the underwriter and in turn he sells it to the public.
Markup price is decided by the underwriter for his offering. Services
charges are included in the new price. The issue of stocks can be advertised
during that period of 20 days.
If you are interested in buying the stocks, an order is placed by you.
If a sale order with same price is there with the broker, your order is
filled and completed. Once the order is complete, the trade details are
sent to all the interested parties. The stock certificate and money for
the stock is exchanged by the brokerage firm in 3 working days. For sale
of shares , you need to inform your broker about the details of your share
and enter a sale order.
An investment account is required for share trading. An account can either
be with your broker or can be online which is operated and managed by
you.
Share price lot depends on the business, if it is going in profits the
share price goes up but if business is making losses the share price comes
down. Therefore Share buyers and sellers closely keep track of company’s
performance. Financial condition of the company is one major factor influencing
sale and purchase of shares. This largerly impacts the market, influencing
the economy.
Stock Markets of the world
Some known names of the North American stock exchanges are Alberta Stock
Exchange and Montreal Stock Exchange of Canada or the AMEX and NASDAQ
of the United States. Rio de Janeiro Stock Exchange of Brazil and Chile
Electronic Stock Exchange are of South America. A considerable drop in
prices of share leads to market crash. To an extent profits and dividends
have an affect on prices of the share but no specific reason can be decided
for the changes that occur in world markets. The changes can be sometimes
be accured to the investors thinking patterns about the trend in the market.
Stock markets
raises the flow of money to the markets. They bring businesses to the
forefront. Stock markets provide investors a share in company profits
and also to get involved in the ownership of the company . It is the investor
who decides stock market
trends. World economy to a greater extent impacted by stock market.
