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The Sharemarket Explained: an Introduction

The development of the corporation as a form of business organisation, and the development of the sharemarket, historically have been closely linked. Unlike other forms of business, a corporation has a large number or owners (shareholders), and the day-to-day financial operational management of the corporation is in the hands of managers, not the owners of the business. The sharemarket has an important role to play in both these aspects of the corporation.

The sharemarket serves as the primary market through which shares are initially issued in order to obtain finance for the development and expansion of a business. It is this primary market transaction that raises new funding for a corporation and allows increased investment in productive capital and economic growth. It was noted that equity raising have increased significantly in the past 10 years.

The sharemarket also provides for secondary market transactions in a company’s existing shares. The secondary market role is important because it adds liquidity to shares and also because it

allows shareholders to signal their judgement about the performance of the company’s managers. If management is not perceived to be performing in the best interests of shareholders, dissatisfaction can be expressed through the sale of shares. Sufficient share sales will result in a fall in the price of the company’s shares. Such an outcome should serve to discipline managers and encourage it to act in a way that better reflects shareholder’s interests. The secondary market role is important in reconciling the conflicts that may arise as a result of the separation of ownership and management of the corporation.

Apart from its primary and secondary market roles, the stockmarket also operates a market in derivative products, including warrants, options and LEPOs. The stockmarket also facilitates an enterprise market, which enable non-listed entities to raise smaller amounts of equity and debt capital on a formal market.