The Stock Exchange is a market place for the buying and selling of shares, debentures and government securities. It is primarily a market in second-hand or existing shares, although some newly-issued shares are placed with dealers on the Stock Exchange. The main Stock Exchange in the UK is in London, although there are smaller exchange in several other major cities.
4.4.1 Securities trader on the Stock Exchange
Only those public companies which have been approved by the Stock Exchange Council can have their shares traded on the Stock Exchange. These companies are described as listed or quoted companies.
The types of securities traded on the Stock Exchange include the following:
- gilt-edged securities (see below),
- securities issued by local authorities and other public authorities,
- preference shares,
- ordinary shares (these are commonly described as equities), and
- shares which are listed on Stock Exchanges in other countries.
Gilt-edged securities are fixed-interest securities issued by the British government. The government borrows by selling these securities to the general public and to financial institutions. They are described as ‘gilt-edged’ because there is no risk of the government defaulting on the payment of interest or on the repayment of the loan. Since the government is by far the largest borrower in the country, it is not surprising that the largest single market in the Stock Exchange is the gilt-edged market.
4.4.2 The functions of the Stock Exchange
· It helps the government and companies to borrow on a long-term basis
Most shares carry no date for repayment – they represent permanent loans to companies. Debentures and long-term government securities may not be repayable for many years. Very few people would be prepared to entrust their savings to the government or to companies on these terms. They are prepared to lend their savings because they want to earn interest and dividends, but they also want to be in a position to get their money back if it should become necessary.
The existence of a Stock Exchange solved this problem because it allows people to sell their shares and other securities at any time. Companies and the government are not affected directly by these sales. They keep the money which they have borrowed. People sell their shares and other securities to other investors (see Figure 4.3)
People who sell their shares may suffer a loss if the market price of the shares has fallen below the price they paid for them. If make a profit.
· It influences the way in which savings are invested
The Stock Exchange is a free market, and share prices change frequently as the conditions of supply and demand change. The prices of shares in companies which are successful or which are believed to have good prospects will tend to rise as the demand for them increases. The opposite will happen to the prices of shares in companies which are performing badly. These movements in share prices will influence the way in which savings are invested. They will tend to flow to companies whose shares have been rising in price.
· It provides a means of valuing financial assets
When wealth is held in forms other than money, it is often difficult to measure the value of that wealth. The price which was originally paid for a piece of land, a house, a work of art or a share in a company is not usually a good indication of its present value. In the case of shares, debentures and government securities which are sold on the Stock Exchange, however, this problem does not arise. The prices of these securities are published daily. It is always possible, therefore, to find their present value.
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