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The Stockmarket: in a nutshell…

Sharemarket Overview:

Permits the trading of financial assets
In particular the trading of corporate equity (shares)
The share represents a residual claim over the assets of a company
Shares also posses an ownership components (a vote in the control of the company)

The Corporation

The corporation differs from other business forms
–      1. Ownership claims are widespread and easily transferable
–      2. Owners do not affect the day to day running of the business
–      3. Shareholder’s liability is limited to the fully paid-up value of the shares
Advantages of the corporate form
–      Can obtain large amounts of finance relatively cheaply
–      Specialised management can be chosen (due to separation of ownership and control)
–      “Perpetual succession”: the corporate form is unaffected by changes in management or ownership
–      The corporate form is suited to large scale operations
Disadvantages of the corporate form
–      The primary disadvantage arises due to the separation of ownership and control
–      Management may not have strong interest to act in the interests of the shareholders

The Sharemarket

Sharemarket has many roles
–      To provide the institutional framework for the issuance of new share capital
–      To act as a secondary market facilitating the trading of existing shares

Primary market role
–      Facilitates the efficient and orderly sale of new share issues
–      Companies raise new equity finance
–      Shares become listed on the stock exchange

Secondary market role
–      Facilitates trading in existing shares
–      No new funds are raised by the issuing company
–      Trading indicates the current market price of the shares
–      Buy and sell orders are placed with and agent
–      Brokers act as agents of the buyer/seller

Enterprise market role
–      Internet-based operation to raise funds for small and medium-sized enterprises
–      Buyers and sellers are required to register their investment proposals
–      Investors with similar investment interests are matched by computer and notified by e-mail

Derivatives
–      Stock markets provides market for trading share-related derivative products
–      Derivatives serve as a risk management tool and/or as a speculative instrument
–      Derivatives traded on the stock markets include
ð  Warrants
ð  Options
ð  Low exercise price options (LEPOS)