Description

The stock market is a highly sophisticated market place where the traded commodity is stocks and shares. The stock market has two elements, known as the primary market and the secondary market. The function of the primary market is to bring together organisations that need funds and investors who want to invest their capital efficiently. A company sells shares in itself (usually through a stockbroker) to investors, who become owners of the company. Money raised by a company in this way is called equity capital. The secondary market is the medium provided by the Stock Exchange which gives investors the opportunity to buy or sell shares, as well as trading other types of equity securities, debt securities and entities such as options, that are based on shares. Prices within the stock market are determined ultimately by supply and demand. Anticipation of a healthy, expanding economy will attract investors wishing to participate in this growth ie. demand will exceed supply and share prices will rise. A depressed outlook for industry will bring about a corresponding fall in confidence - and share prices. Quotations for all securities dealt in the stock market are comprised of two prices; the bid, or selling price and the offer, or buying price.

Purpose

The purpose of the share market is to provide a location in which companies can raise funds by issuing shares and where investors can create wealth for themselves by buying and selling those shares. The services it provides lead to wealth creation, employment generation and economic growth. The market consists of the shares, bonds, notes and debentures of more than 1,200 Australian and overseas companies and other entities and government and public bodies.

Participants

Investment Banks

Investment banks are financial institutions that raise money by underwriting, or selling stocks and bonds. Investment banks provide capital for private and public corporations, certain types of business partnerships, governments and government entities, and, sometimes, offer special financial services for wealthy individuals. They also trade stocks and bonds and various other financial instruments (futures, options and derivatives) as well as, in some cases, currencies and commodities. In terms of financing private businesses, investment banks, generally, are geared towards larger, well-established companies. And their services are almost always very expensive.

Stockbrokers

Stockbrokers are independent financial advisors responsible for providing advice on shares and investments. Stockbrokers are required to be members of the Stock Exchange. This membership means they have been able to meet high standards both professionally and ethically. Stockbrokers must comply with the Australian Stock Exchange "Business Rules" which govern educational standards and the operations and conduct of stockbrokers. Stockbrokers don't only deal in stocks and shares. They can also advise on other investment such as unit trusts, bonds, options, debentures and superannuation. A small brokerage fee is applicable when you make a share transaction through your stockbroker. Brokerage is not fixed and usually varies with the size of a transaction; for small orders it is usually around 2% - 2.5% of the transaction value. On other investments your stockbroker will charge you the standard fee (if any) applicable to that investment. Stamp duty also applied to all buying and selling transactions.

Investors

Investors, through their trading, provide the liquidity that is essential for an efficient and successful stock market. The stock exchange, in turn, must ensure that the market on which they trade is fair, that they have all the information they need to evaluate quoted securities, and that they are protected against loss through others' default.

Key Terminology

Ex-dividend - On the first day of dealing ex-dividend, the market price of an equity is adjusted down by an amount roughly equal to the net dividend payable.

Ex-capitalisation - On the first day of dealing ex-capitalisation, the market price of the shares is adjusted proportionately to reflect the additional shares in issue.

Ex-rights - On the first day of dealing ex-rights the market price of the shares is adjusted to reflect the terms of the issue and the premium on the new share.

Bear - Investor who sells a stock or share in anticipation of a fall in the price. It follows that ‘bearish’ is indicative of pessimism and that a ‘bear market’ describes a falling trend in share prices.

Best - Highest bid price or lowest offer price of a security available in the market at the time the order is given.

Bid price - The selling price.

Blue chip - A leading company or its ordinary shares.

Bull - Investor who buys a stock or share in the expectation that its price will rise and therefore produce a capital profit. Thus, ‘bullish’ indicates optimism about a share or the market and a ‘bull market’ is one showing a rising trend in prices.

Middle price - A price halfway between the bid and offer prices.

Offer price - The buying price.

Par - Face or nominal value of a security.