The Stock Exchange — An Overview

Take a moment to create an image in your mind. Imagine companies like Dangote Group, Globacom and First Bank Holdings as persons. Now imagine these corporate persons everyday at a corporate market like Balogun market in Lagos where they go to sell commodities everyday like regular market women. That, my friends is an image of the capital market, only this time these corporate persons go to the market to buy and sell parts of themselves. Stock exchange for you, ladies and gentlemen — how is that for an image?

Stock exchange is a capital market where financial instruments like stocks and derivatives are traded. In simple terms, stocks are units of ownership in a company. A stock exchange facilitates stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange which is only possible when a company registers as a public quoted company. Basically, it is the rendezvous of stock buyers and sellers.

HISTORY AND DEVELOPMENT OF STOCK EXCHANGES

In the 1600s The Dutch East India Co. employed hundreds of ships to trade gold, porcelain, spices and silks around the globe. Running these expensive voyages was a financial burden so in order to raise funds, the company turned to the private individuals who could invest to support the trip in exchange for a percentage of the company’s profit. This practice allowed the company to afford even grander voyages, increasing profits for both themselves and their savvy investors. Thus by the simple act of selling a percentage of its profits at coffee houses and sea ports, the Dutch East India Company inadvertently became the first company in history to trade on the stock market.

Stock exchange have come a long way since then. Over 60 trillion euros a year are traded on stock exchange markets globally which is more than the value of goods and services of the entire world combined. Different nations have had their own stock exchanges for decades, sometimes centuries. Virtually all were local in nature, as they traded securities of companies headquartered in the country. The world’s largest exchanges continue to be mostly local. Among them are exchanges in Germany, Hong Kong, Canada, the United Kingdom, Shanghai and even Nigeria. However, The New York Stock Exchange is the largest stock exchange in the world, with an equity market capitalization over 25 trillion U.S. dollars in April 2020.

In contemporary times, the stock market is significantly more complicated than it’s original incarnation. So how do companies and their investors use the market today? The answer could be traced back to Adam Smith’s law of supply and demand.

Let’s imagine a tech company that decides to trade publicly on the market just like Facebook Inc. did back in 2012. First, the company will advertise itself to huge investors. If the investors are convinced of the company’s promise, they sign up and get the first crack of investing, after which they sponsor the company’s Initial Public Offering (IPO). This launches the company into the stock market where any private or corporate person who believes the company to be profitable might buy a stock. Buying stock is simply buying partial ownership in the business. The funds serve as capital which finances the tech business’ operations and growth.

As the company becomes more successful, more buyers may see potential and start buying stock. As demand for stock increases, so does the price ergo raising the value of stock and boosting market value of the company. Conversely, if the company is less successful or profitable then the reverse is the case. If investors perceive that their stock value is going to decline, they would sell their stock with the hopes of making a profit or mitigating their losses. As stocks are sold and demand decreasing, stock price would fall leaving the company at a loss.

FACTORS INFLUENCING RISE AND FALL OF STOCK PRICES

The see-saw of supply and demand is influenced by several variables which could make day to day noise on the stock market and affect the viability or otherwise of a company. Some of them include:

1. Market forces such as the fluctuating price of materials necessary for production of goods or services, shifting price or labor and change in production technology.

2. Corporate governance of the company i.e. change of leadership in the board.

3. Regulatory issues that arise from new laws or new regulations which prescribe trade policies that could directly affect a company’s business.

4. Trade wars between international players and actors

5. Good or bad publicity

6. Public policy etc.

By Samaila Mok, for THE FINANCE HUB