The Stock Exchange – SS2 Commerce Lesson Note (Third Term)

A stock exchange is a specialised market where investors can buy and sell existing securities such as shares, stocks, debentures and gilt-edged securities. It is a part of the capital market.

Behavioural objectives

By the end of the lesson, students should be able to:

1. define a stock exchange;
2. state the functions of the stock exchange;
3. name the operators at the stock exchange;
4. list the types of securities dealt in at the stock exchange;
5. distinguish between a bull, a bear and a stag;
6. list the methods of achieving quotation of shares at the stock exchange.

What are the functions (importance) of the stock exchange?

1. It is a market for buying and selling second-hand securities.
2. It assists companies to raise capital.
3. It determines the value (prices) of shares, stock and other securities daily.
4. The prices of shares quoted on the stock exchange serve as economic indicators.
5. It assists the government in raising funds, e.g. through development stock.
6. It protects investors from any form of fraud.
7. It helps to raise the administrative standard of companies by improving financial management and accounting information.
8. It employs brokers, jobbers, clerks etc.
9. It provides information to investors and is also involved in investors’ education.
10. It provides a yardstick for measuring the performance of companies.

Who operates at the stock exchange?

Members operating at the stock exchange are:

1. Brokers (stockbrokers)
2. Jobbers
3. Authorised clerks

What types of securities are dealt in at the stock exchange?

1. Shares
2. Stocks
3. Debentures
4. Bonds
5. Gilt-edged securities: These are securities issued by the government. This type of security is very safe as the government cannot default (i.e. fail to pay its debts). They are therefore regarded as risk-free investments.

Who are the speculators at the stock exchange?

1. Bull: This is a speculator who buys securities with the hope that the price will rise and that he will sell at a higher price for a gain.
2. Bear: This is a speculator who sells securities hoping that the price will fall so that he can buy them at lower prices later and thereby make a profit.
3. Stag: This is a speculator who buys new issues directly from a public limited company in the hope that the shares or stocks will be in great demand once they are quoted on the stock exchange a few days later. The stag hopes to make a profit after selling.

What are the methods of achieving quotation of shares at the stock exchange?

1. Offer for sale
2. Offer for subscription
3. Introduction
4. Placement

Evaluation

1. What is a stock exchange?
2. State five functions of the stock exchange.
3. Name the three operators at the stock exchange.
4. What are gilt-edged securities, and why are they regarded as risk-free?
5. Distinguish between a bull and a bear.

Assignment

1. List the types of securities dealt in at the stock exchange.
2. Explain who a stag is.
3. List the four methods of achieving quotation of shares at the stock exchange.