MEANING FUNCTION AND IMPORTANCE OF THE STOCK EXCHANGE
COMMERCE
SS 3 FIRST TERM
WEEK 8
TOPIC:
STOCK EXCHANGE
CONTENT:
1. Meaning, function and importance
2. Organizational set up and transactions at the stock exchange
3. Stock exchange securities (meaning and types)
4. Capital market: Meaning and method of raising funds
SUB-TOPIC 1:
MEANING AND IMPORTANCE OF STOCK EXCHANGE
The stock exchange is a specialized market for buying and selling securities. These securities are shares and stock which represent ownership interests in businesses, debentures and government bonds. This is a market where those who are interested in purchasing securities are brought into contact with the sellers.
IMPORTANCE OF STOCK EXCHANGE
1. It provides yardstick for measuring performance of companies
2. An avenue for raising capital: Companies and governments raise capital through stock exchange
3. Employment Opportunities: It provides employment opportunities for brokers, jobbers, clerks etc.
4. Provides information to investors: Foreign investors can obtain necessary information about the investment situation of a country
5. Facilitates transfer of investments
6. It is a market for investment: Stock exchange provides an avenue for people to invest in any sector of the economy.
7. Leads to increase in the standard of living: Investment opportunities leads to more income which affects consumption thereby increasing the standard of living
of the people of the country.
FUNCTIONS OF THE STOCK EXCHANGE
1. Fund mobilization
2. Sales of securities
3. Financial markets for investment
4. Provides Avenue for government to raise fund
5. Provision of professional advice
6. Provision of rules and regulations
7. Encourages companies to be more efficient
8. Sale of securities etc
EVALUATION
1. State the importance of stock exchange to the economic growth of Nigeria.
2. Explain four functions of the stock exchange.
3. Explain 4 ways by which the central bank regulates the activities of commercial banks.
4. Discuss the role of stock exchange in promoting investment and economic growth.
SUB-TOPIC 2:
ORGANISATIONAL SET UP AND TRANSACTIONS AT THE STOCK EXCHANGE.
In the stock exchange, buying and selling is facilitated by the brokers and jobbers. They are the only members permitted to conduct business in the stock exchange.
All transactions in the market must follow the laid down rules and regulations and only the companies that have received approval from the council of the exchange can be quoted.
Other members are authorized and unauthorized clerks.
a. Broker: This is an agent who is professionally engaged in the purchases and sales of securities in the stock exchange on behalf of a client in exchange for commission called brokerage. They act as a link between the members of the public who want to buy or sell securities and other members of the exchange.
b. Jobbers: A jobber is a member of the exchange who is the actual dealer in securities. He does business with the broker who is acting on behalf of the investors. Jobbers specialize in a particular type of business, buy and sell securities on their own for a profit called jobber’s return.
c. Unauthorized clerk: An employee of the broker who is not allowed to deal on the floor of the exchange. They are only given permission to assist members of the exchange.
d. Authorized clerk: A clerk of the broker who is entitled to buy and sell on behalf of their employers under the regulations of the exchange. They can enter the exchange and act on behalf of their employers.
SUB-TOPIC 3:
STOCK EXCHANGE SECURITIES
Securities are investments traded in the stock exchange in order to yield income e.g.
shares, stocks gilt-edged, bond and debentures.
TYPES OF SECURITIES
1. Shares: An individual portion of the company’s capital owned by shareholders. A unit of capital measured by the sum of money. It also represents mechanism by which shareholders of a company can have limited liability,
2. Stock: Bundle of shares of mass of capital which can be transferred in fractional amount.
3. Debentures: Debentures are long term loans taken by a public company from members of the public. Debenture holders are creditors of the company who are entitled to interest on the loans taken from them. They are not the owners of the company.
4. Bond: A bond is a security issued by a government or its agency or private institution as a means of raising fund at a specified interest per annum.
5. Gilt-edged: A security issued by the government that has a rate of interest. It is considered to be very safe as the government cannot fail to pay its debts.
EVALUATION:
1. List and explain four securities traded on in the stock exchange.
2. Explain the following terms as used on the stock exchange market:
a. broker b. jobber c. jobber’s return d. brokerage e. unauthorized clerk.
SUB-TOPIC 4:
CAPITAL MARKET: MEANINNG AND METHODS OF RAISING FUNDS.
MEANING CAPITAL MARKET:
A market for lending and borrowing of long-term loans for financing of capital projects and industrial development. The traders in the capital market are known as operators and they act as intermediaries between the fund providers and fund users.
METHODS OF RAISING FUNDS FROM THE CAPITAL MARKET
1. PUBLIC ISSUES: Companies borrow money from the primary market by way of public issues of shares and debentures. Companies take the help of merchant banks.
2. PRIVATE PLACEMENT: Here the capital issue is sold directly to a small group of investors like insurance companies, banks, few private investors etc.
3. OFFER FOR SALES: In the capital market, the company sells the entire issue of shares or debentures to an issue house or merchant banker at an agreed price, which is normally below the par value. The shares or debentures are then resold by issue house/merchant bankers to the public.
4. RIGHT ISSUES: This means selling securities in primary market by issuing shares to existing shareholders.
5. VENTURE CAPITAL: This is an important source of funds for technology based industries and new projects that find it difficult to raise funds directly from capital market.
EVALUATION
1. List and explain four securities traded on in the stock exchange.
2. Explain the following terms as used on the stock exchange market: a. Broker b. jobber c. jobber’s return d. brokerage e. unauthorized clerk
3. A. what is the capital market.
a. Explain 4 ways of raising funds from the capital market.
Objective Questions
- In a primary market, new shares are issued through?
A)
personal selling, publicity and advertising
B)
a prospectus, an offer for sale and bill of exchange
C)
advertising a prospectus, and bill of exchange
D)
a prospectus, an offer for sale and placing
2. The instruments of credit include?
A)
billboards and postal stamps
B)
payment vouchers and statement of account
C)
bills of exchange and promissory notes
D)
bills of exchange and salary vouchers
3.The shares of a company listed on the stock exchange for sale are referred to as?
A)
registered shares
B)
deferred shares
C)
issued shares
D)
quoted shares
4) The shares of a company listed on the stock exchange for sale are referred to as?
A)
registered shares
B)
deferred shares
C)
issued shares
D)
quoted shares
5) What is the role of the capital market in the privatization exercise in Nigeria?
A)
Selling the shares and stocks of the companies to be privatized
B)
Encouraging private companies to participate in the exercise
C)
Negotiating with individuals who want to buy public companies
D)
Advertising for government
6) In international trade, documentary credit is also known as?
A)
credit note
B)
letters of credit
C)
bankers’ note
D)
letter of hypothecation
7) A specialized institution in Nigeria that deals in capital investments in the form of stocks, share, bond and debentures is the?
A)
Securities and Exchange commission
B)
commodity market
C)
Nigerian Stock Exchange
D)
Central Bank of Nigeria
8) A group of assets which a business acquires with the intention of reselling them are referred to as?
A)
current assets
B)
investment assets
C)
fixed assets
D)
intangible assets
9) Authorized share capital is also known as?
A)
called-up share capital
B)
paid-up share
C)
registered share capital
D)
issued share capital
10) A speculator in the stock exchange market who sells securities in anticipation of a fall in their prices
A)
broker
B)
bull
C)
bear
D)
stag
WEEKEND ASSIGNMENT
Read Essential Commerce for Senior Secondary Schools by A.O. Longe Page 349 – 353.
PRE-READING ASSIGNMENT
Read about speculators in the stock exchange.
WEEKEND ACTIVITY
3. Explain the following:
(i) speculation
(ii) Offer of sales
(iii) Private placement (iv) Right issue
(v) Public issue.
REFERENCE TEXTS
Essential Commerce for Senior Secondary Schools by A.O. Longe (Tonad Publishers Ltd) Page 349 – 353.
1. Speculation: Speculation refers to the act of buying and selling stocks or other securities in the hope of earning a profit from short-term price fluctuations. This type of trading is inherently risky, as market movements are often unpredictable and can result in significant losses or profits. Investors who engage in speculation typically use a number of different strategies, such as technical analysis or event-based trading to make their decisions.
2. Offer of sales: Another method used by companies to raise funds from the capital market is known as offer for sale. In this type of issue, the company sells all or a portion of its shares to an investment bank or other financial institution, which then resells them to the public. This method is often used by companies that are not yet profitable or face significant regulatory constraints on their fundraising activities.
3. Private placement: A private placement refers to a type of capital market transaction in which a company sells an unregistered security directly to select buyers, such as institutional investors or wealthy individuals. These placements are usually subject to less rigorous regulatory oversight than public offerings, which can make them a useful tool for companies that need to raise funds quickly or prefer to avoid the scrutiny of public markets.
4. Right issue: A right issue is a type of capital market transaction in which existing shareholders are offered the opportunity to buy additional shares directly from the company at a discounted price. This process is typically used by companies that want to raise funds without incurring additional debt or diluting their ownership stake in the business.
5. Venture capital: Venture capital is a form of financing that is provided primarily by institutional investors and wealthy individuals to support the growth of smaller, high-risk companies. This type of funding is typically used to cover the initial costs associated with starting a new business or commercializing an innovative product or service. Venture capital can be an extremely valuable source of funding for early-stage companies that do not have access to more traditional forms of financing like bank loans or public offerings.
