Operations of the Stock Exchange Market

Describe the Operations of the Stock Exchange Market SDM/ACT 201222101028 Ghana Christian University College Lecturer: Sam Quain Date: 5th April, 2017 Word Count: 1,605 Table of Contents Introduction 3 Definition of Terms 3 Exchange 3 Stock 3 Stock Exchange Market 3 Overview of the Stock Exchange Market 3 Types of Operators in a Stock Exchange 3 Procedure for Functioning of the Stock Market 3 Conclusion 3 Reference 3  Introduction The stock market can be a great source of confusion for many people. The average person generally falls into one of two categories. The first believe investing is a form of gambling; they are certain that if you invest, you will more than likely end up losing your money. Often these fears are driven by the personal experiences of family members and friends who suffered similar fates or lived through the Great Depression - (Nelson, n.d.) “an economic slump in North America, Europe, and other industrialized areas of the world that began in 1929 and lasted until about 1939. Someone who believes along this line of thinking simply does not understand what the stock market is or why it exists. The second category consists of those who know they should invest for the long-run, but don’t know where to begin. Many feel like investing is some sort of black-magic that only a few people hold the key to. More often than not, they leave their financial decisions up to professionals, and cannot tell you why they own a particular stock or mutual fund. Their investment style is blind faith or limited to this stock is going up, we should buy it. This group is in far more danger than the first. They invest like the masses and then wonder why their results are mediocre (or in some cases, devastating). This paper focuses on the stock exchange market highlighting its operations. Keywords: Equities, Securities, Brokers & Traders.  What is an Exchange? First, what is an exchange? Put simply, (Kennon, 2017) defines exchange as “an institution, organization, or association which hosts a market where stocks, bonds, options and futures, and commodities are traded”. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them. If a particular company is traded on an exchange, it is referred to as "listed". What is Stock? (Accounting Coach, 2004), the term stock here refers to “the ownership shares of a corporation”. For example, an owner of a corporation will have a stock certificate which provides evidence of his or her ownership of a corporation's common stock or preferred stock. The owner of the corporation's common or preferred stock is known as a stockholder. Simply defined (Investopedia, LLC, 2017) “it’s a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings”. Overview of the Stock Exchange Market In order to completely grasp the scope of a Stock Exchange Market, one has to first understand the term “Market” – (Ali, 2009), “it’s a public place where buyers and sellers make transactions, directly or via intermediaries”. Sometimes called Stock Market or Share Market or Financial Market. It can be categorized in two groups; The Capital Market: (Nigerian Securities & Exchange Commission, 2015) defines the capital market, as, “a segment of the financial market that deals with the effective channeling of medium to long-term funds from the surplus to the deficit unit”. The process of transfer of funds is done through instruments, which are documents (or certificates), showing evidence of investments. Instruments traded upon here are; Debt Instruments (Sovereign, State & Municipal Bond or Debenture, Industrial Loan or Corporate Bond), Equities (also called Common Stock), Preference Share (Irredeemable, convertible or Irredeemable, non-convertible) Derivatives (Mortgage-Backed Securities – MBS, Asset-Backed Securities – ABS Etc.). The Money Market: (Economic Times, n.d.)“Money market basically refers to a section of the financial market where financial instruments with high liquidity and short-term maturities are traded”. Money market has become a component of the financial market for buying and selling of securities of short-term maturities, of one year or less. Money market consists of negotiable instruments such as; Treasury Bills, Commercial Papers, Certificates of Deposit Types of Operators in a Stock Exchange Before the process of a stock exchange is explained first there are personnel’s or operators involved. The operators who buy and sell securities in the market are of several types, some of which include; The Broker: (Campbell R, n.d.), “an individual who is paid a commission for executing customer orders. Either a floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders”. Simply put, a person who acts as an intermediary between a buyer and seller, usually charging a commission. A "broker" who specializes in stocks, bonds, commodities, or options acts as an agent and must be registered with the exchange where the securities are traded. Jobber: (Ali, Bulls, 2009), “a member of the stock exchange that buys and sells securities on his own behalf, dealing in securities but usually a specialist in just a particular type of security and gaining income from the profit or price difference in the purchase and sale of securities”. A jobber usually deals for himself but he is not prohibited from buying and selling securities on behalf of others. Bulls: (Ali, Bulls, 2009), “a speculator who expects an increase in price, thus buys securities with a view to sell them in future at a higher price thereby making profit”. When the conditions in the stock market are dominated by bulls, its tagged to be a bull market or bullish market and when the price falls and bulls are forced to sell at a loss, it’s called “bull liquidation”. Bears: (Mac Millan, 2009)is an investor who believes a stock or the overall market will decline, therefore he sells with the hope to buy the securities at lower price before the date of delivery”. The effort of the bears to bring down the prices artificially is known as “bear raids”, and when the market is dominated by bears its referred to as “bear market or bearish market”. Main Procedure for Functioning of the Stock Market Before selling securities through stock exchange, companies have to get their securities listed in the stock exchange. The name of the company is included in listed securities only when stock exchange authorities are satisfied with the financial soundness and other aspects of the company. Previously the buying and selling of securities was done in trading floor of stock exchange; today it is and can be executed through computer and it involves the following steps: Selection of Broker: The buying and selling of securities can only be done through Security and Exchange Board registered brokers who are members of the Stock Exchange. The broker can be an individual, partnership firms or corporate bodies. Therefore, the first step is to select a broker who will buy/sell securities on behalf of the investor or speculator. Placing the Order: After opening a Dematerialized Account (if needed, depending on the market rules and medium of trade – electronic or exchange for), the investor can place the order. The order can be placed to the broker either personally or through electronic means; phone, emails etc. Investor must place the order very clearly, specifying the range of price at which security can be bought or sold. Executing the Order: As in the instructions of the investor, the broker executes the order, i.e. he buys or sells the security. The broker then prepares a contract note for the order executed containing the name and the price of security, name of parties and brokerage (commission) charged by him and lastly signs the contract. Settlement This means actual transfer of securities. It is usually the last stage in the trading process of securities done by the broker on behalf of their clients.  Conclusion In concise, stocks are equity investments, which means that buying even one share of a company’s stock means you are a part-owner. The stock exchange market can be said to have functions such as; Providing Liquidity and Marketability to Existing Securities: pricing of securities, safety of transactions, contributes to economic growth, providing scope for speculation, amongst others.  Reference Accounting Coach. (2004). What is stock? (L. AccountingCoach, Producer) Retrieved April 5th, 2017, from www.accountingcoach.com: https://www.accountingcoach.com/blog/what-is-stock Ali, R. M. (2009, January 12th). Stock Exchange. Retrieved April 6th, 2017, from www.scribd.com: https://www.scribd.com/doc/24016453/Stock-exchange-its-functions-and-operations Ali, R. M. (2009, December 1st). Stock Exchange. It's Operations & Functions. Retrieved April 7th, 2017, from www.scribd.com: https://www.scribd.com/doc/24016453/Stock-exchange-its-functions-and-operations Campbell R, H. (n.d.). Definition of a Broker. (Duke University (Fuqua School of Business)) Retrieved April 7th, 2017, from www.nasdaq.com: http://www.nasdaq.com/investing/glossary/b/broker Economic Times. (n.d.). Definition of 'Money Market'. (Bennett, Coleman & Co. Ltd) Retrieved April 6th, 2017, from www.economictimes.indiatimes.com/: http://economictimes.indiatimes.com/definition/Money-Market Investopedia, LLC. (2017). What is a 'Stock'. (Investopedia, LLC.) Retrieved April 6th, 2017, from www.investopedia.com: http://www.investopedia.com/terms/s/stock.asp Kennon, J. (2017, April 7th). What Is a Stock Exchange? (t. Inc., Producer) Retrieved April 5th, 2017, from www.thebalance.com: https://www.thebalance.com/what-is-a-stock-exchange-358113 Mac Millan. (2009). Stocks, Shares & The Stock Exchange - Bear. (Macmillan Publishers Limited) Retrieved April 7th, 2017, from www.macmillandictionary.com: http://www.macmillandictionary.com/thesaurus-category/british/stocks-and-shares-and-the-stock-exchange Nelson, C. (n.d.). Modern American Poetry. (R. Edwin , T. Genevieve , H. Langston , B. John , K. Joseph , W. Richard , . . . J. V. J. , Editors) Retrieved April 5th, 2017, from About the Great Depression: http://www.english.illinois.edu/maps/depression/about.htm Nigerian Securities & Exchange Commission. (2015). INSTRUMENTS TRADED IN THE CAPITAL MARKET. Retrieved April 6th, 2017, from www.sec.gov.ng/: http://sec.gov.ng/instruments-traded-in-the-capital-market/ 1 OPERATIONS OF THE STOCK MARKET