Lecture27_Equity Markets and the Stock Exchange

7/27/2019 Lecture27_Equity Markets and the Stock Exchange

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The share market

and the stock exchange



Equity/Share Markets

• Where equity instruments are being traded

• A formal exchange facilitating the issue, buying

and selling of equity securities

• Provide long term sources of funds

• Equity is available to

– Finance infrastructure eg building and equipment

– Provides creditor confidence inn dealing with the firm

– Ensure availability of funds to absorb abnormal looses

– Improve liquidity of the business



The nature of a corporation

• Publicly listed corporation

– A company whose shares are quoted and traded

on a formal stock exchange

• Ordinary share

– The principal form of equity issued by acorporation, which bestows a claim to residualcash flows and ownership and voting rights



The nature of a corporation...

• The corporation differs from other businessforms

– Ownership claims are widespread and easily

transferable – Owners (shareholders) do not affect the day-to-

day affairs of the company

– Shareholders’ liability is limited to:

• the issue price of shares of a limited liability company

• any partly paid portion of shares of a no-liabilitycompany




• Advantages of the corporate form

– Can obtain large amounts of finance at a relativelycheap cost

– The liquidity of securities facilitates investordiversification and encourages investment incorporate securities

– Separation of ownership and control facilitates:

• appointment of specialised management• greater effectiveness in the planning and

implementation of strategic decisions




• Advantages of the corporate form

– ‘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

– Main disadvantage arises from the separation of

ownership and control

• Conflict of interest between owners (principals) and

managers (agents) known as the agency problem

• Management may try to run business for their own

benefit, rather than that of shareholders, i.e. maximise

shareholder value (share price)




• Disadvantages of the corporate form

– Factors moderating conflict of interest between

owners and managers

• Investors’ ability to sell shares in a corporation, causing

the share price to fall

• Dismissal from the board at AGM by shareholders

• Threat of takeover and loss of employment

• Use of performance incentives, such as share options

• More rigorous corporate governance



Stock Exchange

Functions:

• Establishment of markets in a range of

financial securities

• Provision of securities trading system

• Operation of a clearance and settlement

system• Provision of well informed market to secure

the confidence of all participants



The stock exchange

• Specifically, the following roles of a stockexchange are considered:

– Primary market role

–

Secondary market role – Managed Product role

– Derivative market role

– Interest rate market role

– Trading and settlement roles – Information role

– Regulatory role



Primary market role

• A stock exchange facilitates the efficient andorderly sale of new financial securities – New floats/Initial public offerings (IPOs)

• Initial listing of a corporation on the stock exchange

– Rights issue• Issue of additional shares to existing shareholders on a pro-

rata basis

– Placements• Issue of new shares to selected institutional investors

– Dividend reinvestment plans• Reinvestment of dividends into corporation for additional

shares



Secondary market role

• The stock exchange facilitates trading inexisting shares

– No new funds are raised by the issuing

company – An active, liquid, well-organised secondary

market increases the appeal of buying new

shares in the primary market



Regulatory role...

– The aim of regulation is to ensure market participantshave confidence in the integrity of market operations

– Ensures listed companies meet specified limited levelsof performance and standards of informationdisclosure so investors can make informed decisions

• Continuous disclosure

– Prescribes appropriate behaviour of brokerparticipants on the exchange

• Sanctions include discipline, penalties, loss of licence



The private equity market

• Private equity is an alternative funding source forcompanies unable or not wanting to accessequity capital though a public issue

• Source of funds

– Superannuation funds and life insurance offices

• Use of funds

– Startups, business expansion, recovery finance fordistressed companies, management buyouts

– Aim is generally to:

• improve profitability sufficiently to realise value though anInitial Public Offering (IPO)

• break up business to achieve return on investment

Documents

Lecture27_Equity Markets and the Stock Exchange