The fact that prices of the shares and other securities being traded on the Stock Exchange change from day to day encourages some people to guess which way these prices will move in the immediate future. These people are speculators, and they hope to make a gain by guessing correctly. Speculators do not buy shares for the income they yield in the form of dividends; they buy them with the intension of selling them so as to make a capital gem.
If they expect prices to rise, they will buy shares and expect to sell them at higher prices. If they expect prices to fall, they will sell shares, hoping to re-purchase them later at lower prices.
4.4.4 Buying and selling on the Stock Exchange
In 1986 there were some important changes in the way business is carried out on the Stock Exchange. These changes drastically altered the older, traditional system of trading, which is explained briefly below.
· The traditional system
Only members can trade on the Stock Exchange. These members grouped themselves into firm, which were mainly partnerships. Member firms were of two kinds, stockbrokers and jobbers.
Stockbrokers took orders from client who wished to buy or sell shares. They carried out these orders on the Stock Exchange and charged a commission for their services. This commission would be equal to a percentage of the value of the shares bought or sold. The Stock Exchange fixed the minimum commission which stockbrokers could charge for their services.
Jobbers did not deal directly with the public. They operated within the Stock Exchange and were always prepared to buy shares from or sell shares to stockbrokers. Jobbers acted as wholesalers, buying and selling shares on their own account. They earned an income by adjusting their prices according to changes in supply and demand so that, on average, they sold shares at prices higher than those they paid for them.
A broker with an order to buy or sell some particular shares, say ICI, would approach a jobber and ask ‘What is ICI?’ The jobber would then quote two prices, say ‘398 to 400p’. This meant that he would buy ICI shares at a price of 389p or sell them at 400p. The broker would obtain quotations from several jobbers in order to get the best price for his client.
· Recent changes on the Stock Exchange
By fixing the minimum commission which a stockbroker could charge for his services, the Stock Exchange restricted competition. It means that the more efficient and larger firms of stockbrokers could not capture more business by charging lower fees for their services. Minimum commission have now been abolished.
2. The arrangement whereby only jobbers could buy and sell shares on their own account, and brokers were restricted to acting as agents for people wanting to buy or sell shares, has also been abolished. Stock Exchange firms are now free to act as both jobber and brokers.
3. The rules which restricted membership and ownership of Stock Exchange firms have been charged. This will allow larger institutions, such as banks (both British and foreign; to own Stock Exchange firms.
4.5 Share prices, dividends and yields
· Nominal prices
Most shares have a nominal of face value; this is the value which is printed on the share certificate. It is sometimes referred to as the ‘par value’.
· Market prices
These prices are determined by supply and demand in the market for shares. The market price, therefore, may be higher or lower than the nominal price. If it is higher, the share is said to be at a premium; if it is lower, the share is said to be at a discount.
The dividend on a share is expressed as a percentage of the nominal value. For example, if a company declares a dividend of 25% on its 1$ ordinary shares, then holders of these shares will receive 25% for each share they hold.
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