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

A stock exchange is an organised market where stock brokers and traders buy and sell shares, bonds and other securities.

• Other names: capital market, stock market and share market.
• Trading time: buyers and sellers trade during fixed hours on business days.

Behavioural objectives

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

1. define a stock exchange;
2. state the features and the aims of a stock exchange;
3. name the people involved in the stock exchange;
4. distinguish between the primary market and the secondary market;
5. state the importance of the stock exchange in agriculture.

What is a stock exchange?

A stock exchange is an association of individuals set up to help, regulate and control the buying, selling and dealing in securities.

• Medium of contact: it brings buyers and sellers together so they can trade with one another.
• Organised body: it works under rules that members must obey.

What are the key terms used in a stock exchange?

• Security: a financial paper that can be bought and sold, such as a share or a bond.
• Share (stock): a part ownership of a company, for example a share in a poultry or flour company.
• Bond: a loan given to a company or government, which pays interest to the lender.
• Dividend: the part of a company’s profit paid to shareholders.
• Capital: money used to start, run or expand a business.
• Listed security: a security approved for trading on the exchange.

What are the features of a stock exchange?

The main features of a stock exchange are the seven points below.

1. Organised market: trading follows set rules and procedures.
2. Government recognition: the government approves the exchange to operate.
3. Specific location: trading takes place at a known place, for example a trading floor or an electronic platform.
4. Trading through members: only registered members, such as brokers, carry out transactions.
5. Listed securities: only approved securities are traded.
6. Regulation of trade: the exchange controls how securities are bought and sold.
7. Association of persons: it is formed and run by a group of people.

What are the aims and objectives of a stock exchange?

The aims of a stock exchange are to raise capital, make trading easy and keep trading fair.

1. Raising capital: companies sell shares or bonds to get money for business.
2. Facilitating trading of securities: investors can buy and sell securities easily.
3. Regulating and supervising trading: rules protect investors from unfair practices.
4. Providing facilities for trading: it supplies the place, systems and services needed for trading.

Who is involved in the stock exchange?

The people involved in the stock exchange are called stock traders, equity traders or share traders.

• Investors: people who buy securities to hold for profit or dividends.
• Dealers: traders who buy and sell securities for themselves.
• Stock brokers: agents who buy and sell for clients and earn a commission.
• Arbitrageurs: traders who profit from price differences of the same security in different markets.
• Speculators: traders who buy and sell hoping to gain from price changes, and who accept the risk.
• Hedgers: traders who act to reduce the risk of losing money when prices change.

What are the types of stock exchange?

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

What is the primary market?

The primary market is the market where newly issued securities are offered to the public for the first time.

• Other name: new issue market (NIM).
• Who trades: the issuer (company) sells directly to buyers or investors.

How does the primary market raise capital?

The primary market raises capital in four ways.

1. Public issue: shares are offered to the general public.
2. Rights issue: new shares are offered first to existing shareholders.
3. Private placement: shares are sold to a small number of chosen investors.
4. Preferential allotment: shares are offered to a selected group on special terms.

What are the features of the primary market?

• New capital: it is a market for new, long-term capital.
• Direct issue: the company issues securities directly to investors.
• Certificates: the company gives certificates to the investors (buyers).
• Purpose: it is 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 issuing company taking part.

• Other name: aftermarket, because it deals with securities first issued in the primary market.

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 in one place and prices are set by their competing offers.
• Dealer market: dealers hold securities and trade with buyers and sellers at the prices they quote.

What are the features of the secondary market?

• Liquidity: it lets investors change securities into cash.
• Old securities: it deals in securities issued before.
• Order: it comes after the primary market.
• No direct issue: the company does not sell securities directly to investors.

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

What is the importance of the stock exchange in agriculture?

An agricultural stock exchange is an organised market that deals in agricultural commodities such as farm products and machines.

1. Capital formation: farming companies raise money by selling shares and bonds.
2. Savings culture: people save by buying shares in agricultural businesses.
3. Security market: investors have a ready place to buy and sell securities.
4. Investment opportunity: the public can invest in agriculture and earn dividends.
5. Control of agricultural business: rules of the exchange guide how listed firms operate.
6. Better performance: listed firms must report openly, which encourages good management.

Evaluation

1. Define a stock exchange.
2. List four features of a stock exchange.
3. Name the people involved in the stock exchange.
4. State two differences between the primary market and the secondary market.
5. List four ways in which the primary market raises capital.

Assignment

1. Write a short note on the secondary market. Name its two types and state four of its features. Then list five reasons why the stock exchange is important in agriculture.