Characteristics of Stock Markets PDF

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6 Characteristics of Stock Markets The stock market is an organized body where brokers trade the stock of public companies, who introduce their stock through initial public offerings. Stock prices on the market reflect demand and supply, and traders try to predict stock behavior. An Organized Body A stock exchange is an organized body with a management committee and rules that control how the exchange works. Traders on the exchange are subject to the rules of the exchange, which are enforced by the management committee. At one time, a stock market was a physical place where traders met faceto-face to make deals, but today most trades take place electronically. Public Company Stock Public companies are a key component of stock markets. Public companies are those that have stock that is bought and sold on a public stock exchange. Before a stock can be sold, it must first be listed on the exchange. To protect its investors, a public company is required to disclose financial and business information that could affect stock value. Trading Through Brokers Trading on a stock exchange is restricted to stock brokers and traders who are members of the exchange. Individual investors must have a brokerage account in order to participate in trading. For many people, brokerage services are provided as part of an employer-sponsored retirement investment fund. For individuals who want to trade independently, an individual account is required. Going Public with IPOs Initial public offerings (IPOs) are the mechanism used to introduce a company’s stock for public sale on a stock exchange. An IPO is said to take place in the primary market, with follow-on trading between investors occurring in the secondary market. An IPO allows a company to raise capital for future growth by selling shares to the public. Supply and Demand Affect Prices The price of a company’s stock reflects supply and demand for the stock itself and is often independent of the company’s success. A company’s stock may be considered desirable for a variety of reasons, from the strength of an industry sector to the popularity of a brand. Stock Market Prediction In order to make a profit, stock market traders must predict whether a stock’s value will rise. Share prices often reflect the overall economy and can be volatile as investors react to financial news and current events, but traders who are successful predictors can realize significant gains.

1. Economic Barometer: A stock exchange is a reliable barometer to measure the economic condition of a country.

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Every major change in country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Stock exchange is also known as a

pulse of economy or economic mirror which reflects the economic conditions of a country. 2. Pricing of Securities: The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, government and creditors. The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities. 3. Safety of Transactions: In stock market only the listed securities are traded and stock exchange authorities include the companies names in the trade list only after verifying the soundness of company. The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange. 4. Contributes to Economic Growth: ADVERTISEMENTS:

In stock exchange securities of various companies are bought and sold. This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth. 5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new issues, better trading practices and by educating public about investment. 6. Providing Scope for Speculation: To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities. 7. Liquidity: The main function of stock market is to provide ready market for sale and purchase of securities. The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want. The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term. 8. Better Allocation of Capital: The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market. The general public hesitates to invest in securities of loss making companies. So stock exchange facilitates allocation of investor’s fund to profitable channels. 9. Promotes the Habits of Savings and Investment: The stock market offers attractive opportunities of investment in various securities. These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.

Benefits of the Stock Exchange Access to Capital A 2012 National Small Business Association survey revealed that one of the major impediments to business growth was a lack of affordable capital. Companies listed on a stock exchange can quickly raise affordable capital by issuing more shares for investors to purchase. The capital raised from the issuance of shares can be used to help the company grow and pay for different business costs. Enhanced Profile Companies listed on a stock exchange are much more recognizable and visible than their privately held counterparts. The increased visibility that comes with being listed on an exchange can help a company attract new clients and customers, and it draws press attention that might be difficult and expensive for the company to draw on its own. Ability to Attract Better Employees High quality employees are attracted to employers that have name recognition and visibility. Stock exchanges can help companies become household names and better attract employers capable of making the company more profitable. Because of the increased access to capital, companies are also able to better compensate employees to keep them from moving to competitors. Increased Visibility There may be no better PR move for a company than to go public, as the process generates free publicity and excitement in the marketplace for the company. A successful IPO also results in a flood of cash for a newly public company, and this cycle can be repeated down the road with secondary offerings of additional stock. With this additional money, companies can further expand their operations, or allow companies to offer more lucrative share option packages to employees. Ability to Maintain Control Companies not listed on stock exchanges typically rely on capital provided by venture capitalists and private investors. In exchange for purchasing shares of a privately held company, investors usually insist on having some degree of control of the company, including having members appointed to the board. These demands can work counter to the intentions of the company itself; outside investors often prioritize rapid returns on their investment rather than supporting a company's long-term vision. Stock exchanges allow companies to maintain more autonomy and control, because people who purchase the shares of a publicly traded company only have the limited rights afforded to all shareholders. Reduction of the Cost of Other Capital

Going public reduces the costs of obtaining capital through bank loans. Banks view publicly traded companies as less of a credit risk than their privately held counterparts, because publicly traded companies have access to other capital and the auditing requirements for public companies make their financial condition more transparent. What is Right Issue? These are the shares issued by the company with the purpose of increasing the subscribed share capital of the company through an additional issue. 

These shares are issued to the existing equity shareholders through notices to every shareholder.

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It gives the choice of purchasing the shares at the discounted prices by the company within a stipulated time frame.

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The shareholders are required to confirm the number of shares opted within the given period.

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These rights can be forfeited either completely or partially enabling the company to issue these additional shares to selected investors or the general public on a preferential basis through a special resolution.

The benefits of rights issue are: 

Increased control of the existing shareholders

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Enhancement in the value of shares and thus there is no loss on the existing shareholders

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It increases the goodwill of the firm and brand perception

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No cost involved with the issuance of shares

There are a couple of drawbacks to the same: 

There tends to be a dilution in the value of shares due to increase in its numbers

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It does offer a temporary solution to management issues but may not necessarily guide in the long run.

What is Bonus Issue? These are shares issued as a gift to the existing shareholders depending on the number of shares held by them. 

They are issued free of cost in specific proportion decided by the company. For e.g. a bonus issue of 3:1 means that for every 3 shares held by a shareholder, one bonus share is allotted to the shareholder.

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Bonus shares do not inject any fresh capital into the company since they are issued without any consideration. It also does not make any changes to the net worth of the entity.

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Such shares can be issued out of any of the following accounts: o

Free Reserves

o

Capital Redemption Reserve account

o

Securities Premium Account...