Agriculture in Stock Exchange II – JSS3 Agricultural Science Lesson Note (Second Term)

The stock exchange (capital market) has two types: the primary market, where new securities are sold, and the secondary market, where existing securities are traded.

Behavioural objectives

1. Name the two types of stock exchange.
2. Explain the primary market and list the means by which it raises capital.
3. State the features of the primary market.
4. Explain the secondary market and name its two types.
5. State the features of the secondary market.
6. List the importance of the stock exchange in agriculture.

What are the key terms used in the stock exchange?

A stock exchange is an organised market where securities are bought and sold.

• Security: a share or bond that can be bought and sold, such as a share in an agro-processing company.
• Share: a part ownership of a company, which may earn the owner a dividend.
• Bond: a loan to a company or government that is repaid with interest.
• Issuer: the company that offers securities for sale.
• Investor: a person or organisation that buys securities to earn a return.
• Capital: money used to start, run or expand a business such as a farm.
• Liquidity: how easily a security can be changed into cash.

What are the types of stock exchange?

There are two types of stock exchange: the primary market and the secondary market.

What is the primary market?

The primary market is the capital market where newly issued securities are sold by the company directly to investors for the first time.

• Other name: it is also called the new issue market (NIM).
• Parties: the transaction is between the issuer and the buyers or investors.
• Example: an agro-allied company sells new shares to raise money for a bigger processing plant.

What are the means of raising capital in the primary market?

The primary market raises capital through four means.

1. Public issue: the company offers new shares to the general public.
2. Rights issue: the company offers new shares to its existing shareholders first.
3. Private placement: the company sells shares to a small number of chosen investors.
4. Preferential allotment: the company issues shares to a selected group at an agreed price.

What are the features of the primary market?

The main feature of the primary market is that it provides new, long-term capital.

• New capital: it is a market for new, long-term capital.
• Direct sale: securities are issued by the company directly to investors.
• Certificates: the company issues certificates to investors (buyers).
• Purpose: it is usually used to set up new businesses or expand existing ones.

What is the secondary market?

The secondary market is the market where investors buy and sell securities they already own, without the company that issued them taking part.

• Other name: it is called the “aftermarket” because it trades securities first issued in the primary market.
• Money goes to: the selling investor, not the company.

What are the types of secondary market?

There are two types of secondary market: the auction market and the dealer market.

• Auction market: buyers and sellers meet and bid openly, and the highest buying price meets the lowest selling price.
• Dealer market: dealers hold securities and buy or sell them to investors through a network, often by telephone or computer.

What are the features of the secondary market?

The main feature of the secondary market is that it gives investors liquidity.

• Liquidity: it creates a means of converting securities to cash.
• Old securities: it is a market for previously issued securities.
• Order: it comes after the primary market.
• No direct issue: the company does not issue securities directly to investors.

What is the difference between the primary market and the secondary market?

The primary market sells new securities, while the secondary market resells existing ones.

What is the importance of the stock exchange in agriculture?

The stock exchange helps agricultural businesses raise money and gives people a safe way to invest in agriculture.

• Capital formation: agricultural companies raise money for farms, machines and processing plants by selling securities.
• Savings culture: it encourages people to save by buying shares instead of spending all their money.
• Security market: it gives a regulated place where securities are bought and sold safely.
• Investment opportunity: people can invest in agricultural companies and earn dividends.
• Control of agricultural business: listed companies must follow rules and report their activities openly.
• Better performance: investors watch listed companies, so managers work harder to run them well.

Evaluation

1. Name the two types of stock exchange.
2. Why is the primary market also called the new issue market?
3. List the four means by which the primary market raises capital.
4. Why is the secondary market called the “aftermarket”?
5. Name the two types of secondary market.

Assignment

1. Draw a table with two columns, “Primary market” and “Secondary market”. Write three features under each, then list any five importance of the stock exchange in agriculture.