COMMERCE FORM 5 – STOCK EXCHANGE

STOCK EXCHANGE

What is stock exchange?

This is the market where already issued securities like shares, bonds, and stocks can be bought and sold. Examples include DSE, KSE, and USE, which stand for Dar es Salaam Stock Exchange, Kenya Stock Exchange, and Uganda Stock Exchange, respectively.

Functions of stock exchange

1. It provides a ready market for those who want to buy and sell their securities.
2. It is part of saving by members of the public.
3. It facilitates the raising of capital for investment.
4. It is used to judge a country’s economic progress.
5. It is an important means of raising government revenue through tax.
6. It provides employment opportunities.
7. It publishes useful information, statistics, and summaries of various companies.

Important terminologies used in stock exchange

1. Par value: This is the face or nominal value of a security as it is written on its face (cost price).
2. Market value: Refers to the current price of a security as it is sold in the market according to demand.
3. Cum. Div (including dividends): This term means “with dividends,” implying that the price quoted in a security includes some amount of outstanding interest for the previous period when an investor or seller declares dividend for the first time.
4. Ex-Div (excluding dividends): This term means “without dividends,” implying that the price quoted excludes dividends to be paid in advance when an investor declares it for the first time.
5. Quoted company: A company which allows its shares to be traded in the stock exchange market. This applies only to public limited companies, e.g., CRDB, Precision Airways.
6. Unquoted company: A company whose shares are not traded in the stock exchange. This includes all private companies and some public companies that decide not to sell their shares on the stock exchange, e.g., Bakhresa, Mengi, Manji.
7. To go public: The act of converting a private limited company into a public company, usually when a private company wants its shares to be traded on the stock exchange market.
8. Staging: Speculation that occurs in the new issue of shares in the stock exchange.
9. Underwriter: An institution or person responsible for collecting or selling shares on behalf of the issuing company under the authority of the stock exchange.

Members of stock exchange

Include:

1. Brokers
2. Jobbers

Who are brokers?

These are people who buy and sell securities on behalf of others or owners.

Who are jobbers?

These are traders who buy and sell securities on their own account. They trade in securities like wholesalers or retailers.

Jobbers can be classified into three categories:

• Bulls
• Bears
• Stags

Bulls

These are jobbers who buy securities (e.g., shares) when they are cheap, hoping to sell them at a higher price to make a profit.

Bears

These are jobbers who sell shares when the price is high, speculating that the price will drop later and they will be able to buy them again at a cheaper price.

Stags

These are jobbers who deal with new issues of securities, for example blue chips, hoping to sell them at a profit.

Differences and similarities between jobbers and brokers

Similarities

1. Both operate in the capital market.
2. Both do not hold shares for investment.

Differences

1. Brokers earn commission while jobbers earn profit by selling securities.
2. Brokers are like retailers in securities while jobbers are like wholesalers.
3. Brokers do not speculate on security prices while jobbers do.

SECURITIES TRADED IN STOCK EXCHANGE / SECURITIES BOUGHT AND SOLD IN STOCK EXCHANGE

Concept

A security is any document that gives the holder a right to money or property. Among the securities traded in stock exchange are:

1. Share: This is a unit of capital of a company divided into units of uniform value. Whoever contributes to the capital of the company becomes an owner and is called a shareholder. A share certificate is issued to certify that a person has contributed some amount of money to the total capital invested in the company. Shares can be divided into two classes:
   a. Ordinary shares – owned by promoters of the company who are paid after all other shareholders have been paid.
   b. Preference shares – shares of the company which are considered first in the distribution of profits.
2. Gilt-edged securities: These are securities mainly issued by the government to regulate circulation and implement fiscal and monetary policy. Examples include treasury bills, government stocks, government bonds.
3. Blue chips: Shares of companies with high repute, i.e., companies performing well in business. Examples include CRDB, Precision Airways, Swiss Air.
4. Bonds: Loan securities given by companies, government, or individuals showing indebtedness.
5. Debenture: A document or loan certificate issued by a company under its seal indicating that the company or individual has acknowledged the debt. It can be naked, redeemable, or irredeemable.
6. Stocks: Sets of shares issued collectively or in a group, e.g., TOL, TATCPA.

DAR ES SALAAM STOCK EXCHANGE (D.S.E)

• Historical background

The financial market was incorporated in 1996 and became operational in 1998. Its functions are the same as other stock exchange markets. It is located in Twiga Building, 4th floor, Samora Avenue, Dar es Salaam. It operates five days a week from 10:00 am to 6:00 pm.

What are the securities traded in Dar es Salaam?

1. Ordinary shares
2. Bonds
3. Government securities

Questions pertaining to stock exchange

1. Outline qualifications needed to be a member of stock exchange.
2. Identify procedures of joining stock exchange market.

LISTED COMPANIES IN DSE

Listed companies are those which operate and decide to sell their securities in DSE. Currently, there are 14 listed companies, including:

• CRDB Bank
• Precision Airways
• Swissport
• Twiga Cement
• TAHACO
• TOL

Common securities traded in DSE

1. Ordinary shares
2. Bonds
3. Government securities

DSE MEMBERSHIP

The membership in DSE consists of:

1. Licensed Dealing Membership (LDM)
2. Associate Membership (AM)

Who are?

1. LDM: Members allowed to access the trading floor, especially buying and selling, e.g., listed companies.
2. AM: Institutions and companies which support the DSE, e.g., banks, brokers, and jobbers.

TRADING SYSTEM IN DAR ES SALAAM STOCK EXCHANGE

Trading is conducted in the DSE trading floor using a special device called ATS (Automated Trading System).

This is an electronic system which matches bids versus offers using an electronic matching engine.

FUNCTIONS OF DAR ES SALAAM STOCK EXCHANGE

1. To provide a market for buying and selling securities.
2. To set prices for every security bought or sold to investors.
3. To provide opportunities for more investments and savings as part of economic growth of the country.
4. To provide useful information and statistics for various companies, especially prospective investors.
5. To prepare stock exchange indices which are essential in checking the country’s economic progress.
6. To provide advice on effective investment opportunities.
7. To ensure the safety of investors is guaranteed.

ECONOMIC BENEFITS OF STOCK EXCHANGE

What are they?

1. It enables industries and companies to mobilize savings more cheaply than otherwise.
2. It helps to reduce fluctuations in prices of commodities.
3. It provides employment opportunities.
4. It helps to channel funds to investment in economic sectors where earnings are high.
5. It encourages companies and businesses with low performance to improve.
6. It helps to mobilize foreign exchange when securities are sold in other countries.
7. It increases interdependency between the private and public sectors through this market.
8. It enables securities to be easily turned into liquid assets of companies, financial institutions, and government.

What factors influence the price of securities in the stock exchange market?

• Demand and supply of shares and stocks: These forces influence the price of shares. When shares are in high demand, prices rise; when demand is low, prices fall.
• Bank rate: The bank or interest rate affects stock prices. High bank rates discourage borrowing, reducing money supply and lowering stock prices. Low bank rates encourage borrowing, increasing stock prices.
• Political situations: Political stability affects stock prices. Conflicts, wars, and lack of political freedom reduce investment and lower stock prices.

MEMBERSHIP OF THE STOCK EXCHANGE

The conditions for becoming a member of the stock exchange are:

1. The candidate must obtain a nomination from a retiring member before applying for admission and pay a nomination fee.
2. Applicant must be over 18 years of age.
3. Applicant must provide referees in the form of a proposer and a seconder who are not under any financial obligation in case of candidate default.
4. Should never have been declared bankrupt or, if declared, must have been discharged of the debt.

GENERAL PROCEDURES FOR PURCHASING SECURITIES

1. Deciding on objective: The investor must decide on his/her objectives in relation to buying shares.
2. Contacting stockbroker: After deciding, the investor contacts a stockbroker to discuss investment matters and market trends.
3. Price quotation: The broker contacts the jobber who quotes the price for the shares, usually two prices.
4. The bargaining day: The broker meets the jobber to bargain over prices. After agreeing, the broker sends a contract note to the client (investor).
5. After agreeing on the price, the broker contacts the jobber on behalf of the client.
6. The buying broker completes a stock transfer form and has it signed by the seller for whom he/she is acting.

WHY INVEST IN SECURITIES?

Shareholders enjoy many advantages that come with owning securities. These include:

1. Dividends: When companies make profits, the board of directors usually gives a percentage of profit to shareholders as dividends.
2. Investment purposes: Mainly interested in making profits.
3. Some people buy shares and stocks as a means of saving because they are easily marketable.
4. Shares give shareholders the right to attend and vote on important company policies during annual general meetings.
5. Shares may be accepted as collateral security against loans from financial institutions.
6. Capital growth: If the company grows, the value of shares also grows.

DISADVANTAGES OF INVESTING IN SHARES

1. Share prices fluctuate depending on various factors like demand and supply.
2. If the company’s profit falls, the dividend also falls. If it makes losses, the company may not be able to pay dividends.
3. If share prices fall, their asset value decreases, and if the company collapses, the shares become worthless.
4. If the company goes into liquidation, shareholders are the last to be paid after all other creditors.

RIGHTS OF SHAREHOLDERS

Shareholders have the following rights:

1. The right to amend the Memorandum of Association.
2. The right to sell shares.
3. The right to vote at general meetings.
4. The right to approve or disapprove the sale or purchase of company assets.
5. The right to approve payment of dividends, issue of bonus shares, rights issues, and increase in share capital.