Stock Exchange: Functions, Securities and Membership

A stock exchange is a regulated marketplace where financial securities such as stocks, bonds, commodities, and derivatives are traded among investors. It acts as a platform for companies to raise capital by issuing stocks and for investors to trade these securities. Stock exchanges operate based on supply and demand dynamics, which allow participants to trade assets at prevailing market rates.

Functions and Importance of the Stock Exchange

1. Market for Second-hand Securities: It acts as a marketplace where previously issued securities like stocks, bonds, and derivatives are traded among investors.
2. Capital Raising for Companies: Companies utilize the stock exchange to raise capital by issuing stocks in order to fund operations, expansion, and various projects.
3. Value Determination: It determines the value of securities through supply and demand. It establishes market prices for shares and other financial assets.
4. Information Dissemination: It keeps industrialists, investors, and the public informed about market trends, company performance, and economic developments.
5. Economic Indicator: Prices quoted on the stock exchange serve as indicators reflecting the overall economic health and investor sentiment.
6. Support for Monetary Policies: It aids governments in implementing monetary policies by regulating aspects of the financial market.
7. Assistance in Government Finance: Governments raise funds through the issuance of gilt-edge securities which are facilitated by the stock exchange.
8. Investor Protection: It safeguards investors by providing a regulated environment. This reduces the likelihood of fraudulent activities in trading.
9. Agency Services: The stock exchange offers agency services like buying and selling securities on behalf of clients. This leads to smoother transactions.
10. Measuring Goodwill: Prices on the stock exchange are used to assess and measure the goodwill and reputation of companies.
11. Advisory Role: The stock exchange offers advice to governments, industrialists, and other stakeholders based on market trends and financial analysis.
12. Assistance to Private Companies: It assists private companies in going public by facilitating Initial Public Offerings (IPOs) and listing their shares.
13. Encouragement of Investment: It directs the public towards viable investment opportunities. It fosters investment in productive business ventures.
14. Long-term Loans to the Public: Through debentures and other financial instruments, it provides long-term loans to the public. Therefore, it aids in funding various projects.
15. Improvement in Administrative Standards: The stock exchange contributes to raising the administrative standards of companies through compliance and transparency requirements.

Membership of the Stock Exchange

The stock exchange is constituted by stock-breakers, stock-jobbers, authorised clerks, and unauthorised clerks.

1. Stockbrokers: Stockbrokers act as intermediaries for members of the public who wish to buy or sell securities. They earn a commission, known as brokerage, for facilitating these transactions on behalf of their clients.
2. Stockjobbers: Unlike brokers, jobbers trade securities on their own behalf. They don’t directly engage with the public but conduct transactions through brokers who act as intermediaries. Their profit margin is known as the jobber’s turn or margin.
3. Authorised Clerks: These are salaried assistants employed by principal members of the stock exchange, such as brokers and jobbers. They are empowered to buy and sell securities on behalf of their principals. They effectively represent their principals’ interests on the trading floor.
4. Unauthorised Clerks: Similar to authorised clerks, these individuals are salaried assistants employed by principal members (brokers and jobbers) of the stock exchange. However, they lack access to the trading floor and do not have the authority to conduct securities transactions on behalf of their principals.

• Liquidation and Merger
• Shares and Debentures
• Insurance

Types of Securities Dealt with in the Stock Exchange

1. Stock: This represents the capital of a company or a government loan issued in such a way that purchasers can divide it into smaller fractions according to their preferences.
2. Shares: These units represent portions of a company’s capital issued in fixed amounts that cannot be further subdivided. They typically denote ownership in the company and often come with voting rights.
3. Debentures: These securities signify long-term loans provided by the public to a public company. They usually come with fixed interest rates and maturity dates.
4. Bonds: Bonds are essentially promises to pay specified amounts of money with interest at predetermined intervals. They are typically issued in multiples of a specific value, such as N200, and are considered debt securities.
5. Gilt-edged securities are securities governments use to raise funds. They are considered highly secure and reliable. They are often referred to as “gilt-edged” due to their low-risk nature. This makes them a preferred investment choice for risk-averse investors.