Fundamentals of Financial Services Markets Chapter 6

Lesson Objectives By the end of the lesson: Everyone MUST be able to: Explain the function of a stock exchange Explain the purpose of a stock exchange List the following stock market indices and which markets they belong: Dow Jones Industrial Average S&P 500 FTSE 100 DAX Hang Seng Nikkei 225

Stock Exchanges A stock exchange is simply a place where financial instruments can be bought or sold. They began simply as meeting places where investors gathered to discuss companies and their shares, and to trade shares As they became more formal, these meeting places became the trading floors of exchanges, where traders made deals face to face. Only members of the exchange can access the electronic market (Member firms such as banks) Electronic systems such as SETS is used on the London Stock Exchange. SETS (Stock Exchange Trading System) matches buyers and sellers and executes a trade. The exchange makes arrangements to transfer share ownership and the cash. Today, many of these exchange floors have been replaced by sophisticated electronic dealing systems run on computer systems that now operate in major cities throughout the world.

A short video clip introducing the stock exchange and how it works. Stock Exchanges A short video clip introducing the stock exchange and how it works. Watch the video clip and jot down 4 main points about how a stock exchange works. https://www.youtube.com/watch?v=F3QpgXBtDeo Only members of the exchange can access the electronic market (Member firms such as banks) Electronic systems such as SETS is used on the London Stock Exchange. SETS (Stock Exchange Trading System) matches buyers and sellers and executes a trade. The exchange makes arrangements to transfer share ownership and the cash. Be prepared to share your points !

Stock Exchanges A stock exchange is simply a place where financial instruments can be bought or sold. Financial Instruments Sellers Cash STOCK EXCHANGE Buyers Only members of the exchange can access the electronic market (Member firms such as banks) Electronic systems such as SETS is used on the London Stock Exchange. SETS (Stock Exchange Trading System) matches buyers and sellers and executes a trade. The exchange makes arrangements to transfer share ownership and the cash. Financial Instruments Cash

STOCK EXCHANGES Equities can be bought and sold on the following world famous exchanges: New York Stock Exchange (NYSE) London Stock Exchange (LSE) Abu Dhabi Securities Exchange (ADX) Singapore Exchange (SGX) Colombo Stock Exchange Johannesburg Stock Exchange (JSE) Tadawul (Saudi Arabia) Most countries have their own stock exchange. An exchange is like a market place where buyers and sellers “meet” to trade in equities. Most of these transactions are now completed electronically These exchanges trade millions of shares every day and began as meeting places where buyers (or people representing them) would meet sellers (or people representing them) to agree purchases and sales. Now the majority of deals are made electronically, with most exchanges essentially operating as electronic auction facilities similar to eBay

FUNCTION of Stock Exchange Case Study: Roger Roger holds shares in an international oil company that he is considering selling. He goes to the nearest stock exchange, where he finds other buyers and sellers of shares have gathered and he is able to find someone who is willing to pay a price that he considers reasonable for his oil company shares. Roger will probably use the services of a member firm, such as a bank, to put his wish to sell the oil company shares onto the exchange’s computer system. The exchanges system may have a number of interested parties that have already expressed a wish to buy the oil company’s shares. As long as Roger is willing to sell at the same price that a purchaser is willing to buy, the exchange's system will match Roger’s order to buy with the appropriate order to sell. The exchange will then make arrangements to transfer ownership of the shares to the new owner and transfer the cash proceeds to Roger. Roger would probably have to use the services of a member firm e.g. bank to put his wish to sell the oil company shares onto the exchanges’ computer system. FUNCTION of Stock Exchange Facilitate trading in financial instruments, particularly shares – enabling sellers to sell their investments and enabling interested buyers to purchase investments.

IPOs Initial Public Offering (IPO) Raises Money Stock exchanges trade shares in listed companies. Generally, to become a listed company: The company needs to be well established The company needs to be large enough to attract sufficient trading in their shares Initial Public Offering (IPO) A company goes public when shares are offered to the public for the first time See Chapter 4: Equities for more info on IPOs Advantages Providing access to capital for growth. Enabling companies to raise finance for further development, both at the time of admission and through further capital raisings. Creating a market for a company’s shares or broadening the shareholder base. Placing an objective market value on the company’s business. Encouraging employees’ commitment and incentivising their long-term motivation and performance, by making share schemes more attractive. Increasing the company’s ability to make acquisitions by using their own quoted shares as payment Drawbacks The costs involved in listing and the management time needed for it to be successful. Once listed, the price and liquidity of the company’s shares are affected by market conditions. A potential loss of control due to widening the shareholder base. The need for increased disclosure requirements about the company and its plans. Ongoing reporting to shareholders, exchanges and regulators. Raises Money Increases the public profile and awareness of the company Increases liquidity The Facebook IPO raised around $16 billion: $7billion for the company and the other $9 billion for some earlier investors to sell some, or all, of their shares. After an IPO, shares are much easier to buy or sell as they are now traded on a stock exchange

Measures aggregate price movements of companies’ shares on an exchange Stock Market Indices Measures aggregate price movements of companies’ shares on an exchange Provide a snapshot of how share prices are performing in a particular stock market, or across several markets. Single market indices Global market indices Measures price movements of companies’ shares listed on one stock exchange Measures price movements of companies’ shares listed on various exchanges internationally A stock market index is simply a number that amalgamates a group of share prices weighted by the size of the firm – so, the price movements of larger firms have a bigger effect on the… The significance of the index is how much it has moved, and that move could be largely attributable to particular shares that are included in the index overall. The index value is termed points – as in ‘the DJIA increased by 50 points today’ The points have no specific value in themselves – the way to look at an index number is to compare it with a previous value, such as the previous day’s number or the previous high. Many stock market indices relate to particular markets, or geographies. Investors can gauge the overall performance of the market Smoothens out anomalies and provide a consistent picture of the mood across the market. Provides a benchmark for investors - assess whether their portfolios of shares are doing better (outperforming) or worse (underperforming) than the market in general.

Stock Market Indices Examples China UK FTSE 100 Hang Seng Index ‘Footsie’ Largest 100 UK companies Covers 70% of the UK market value 58 stocks USA Germany Dow Jones Industrial Average (DJIA) DAX 30 stocks A narrow view of the US stock market 30 stocks Japan USA Nikkei 225 S&P 500 225 stocks A wider view of the US stock market 500 stocks

Research Activity Which index (or indices) are the following 15 companies included within? Company Name Which index/indices? Adidas Apple Barclays BP Canon Cathway Pacific Airways Coca-Cola Exxon Mobil Honda HSBC McDonald’s Sharp Sony Toyota Volkswagen

Plenary Have you met the learning objectives? Use your learning objectives sheet to assess your learning.