The share market and the stock exchange

Equity/Share Markets
Where equity instruments are being traded A formal exchange facilitating the issue, buying and selling of equity securities Provide long term sources of funds Equity is available to
Finance infrastructure eg building and equipment Provides creditor confidence inn dealing with the firm Ensure availability of funds to absorb abnormal looses Improve liquidity of the business

The nature of a corporation

Publicly listed corporation
A company whose shares are quoted and traded on a formal stock exchange

Ordinary share
The principal form of equity issued by a corporation, which bestows a claim to residual cash flows and ownership and voting rights

The nature of a corporation...

The corporation differs from other business forms
Ownership claims are widespread and easily transferable Owners (shareholders) do not affect the day-today affairs of the company Shareholders liability is limited to:
the issue price of shares of a limited liability company any partly paid portion of shares of a no-liability company

The nature of a corporation...

Advantages of the corporate form
Can obtain large amounts of finance at a relatively cheap cost The liquidity of securities facilitates investor diversification and encourages investment in corporate securities Separation of ownership and control facilitates:
appointment of specialised management greater effectiveness in the planning and implementation of strategic decisions

The nature of a corporation...

Advantages of the corporate form
Perpetual successionthe corporate form is unaffected by changes in management or ownership The corporate form is suited to large-scale operations

The nature of a corporation...

Disadvantages of the corporate form
Main disadvantage arises from the separation of ownership and control
Conflict of interest between owners (principals) and managers (agents) known as the agency problem Management may try to run business for their own benefit, rather than that of shareholders, i.e. maximise shareholder value (share price)

The nature of a corporation...

Disadvantages of the corporate form
Factors moderating conflict of interest between owners and managers
Investors ability to sell shares in a corporation, causing the share price to fall Dismissal from the board at AGM by shareholders Threat of takeover and loss of employment Use of performance incentives, such as share options More rigorous corporate governance

Stock Exchange
Functions: Establishment of markets in a range of financial securities Provision of securities trading system Operation of a clearance and settlement system Provision of well informed market to secure the confidence of all participants

The stock exchange

Specifically, the following roles of a stock exchange are considered:
Primary market role Secondary market role Managed Product role Derivative market role Interest rate market role Trading and settlement roles Information role Regulatory role

Primary market role

A stock exchange facilitates the efficient and orderly sale of new financial securities
New floats/Initial public offerings (IPOs)
Initial listing of a corporation on the stock exchange

Rights issue
Issue of additional shares to existing shareholders on a prorata basis

Placements
Issue of new shares to selected institutional investors

Dividend reinvestment plans

Reinvestment of dividends into corporation for additional shares

Secondary market role

The stock exchange facilitates trading in existing shares
No new funds are raised by the issuing company An active, liquid, well-organised secondary market increases the appeal of buying new shares in the primary market

Regulatory role...
The aim of regulation is to ensure market participants have confidence in the integrity of market operations Ensures listed companies meet specified limited levels of performance and standards of information disclosure so investors can make informed decisions
Continuous disclosure

Prescribes appropriate behaviour of broker participants on the exchange

Sanctions include discipline, penalties, loss of licence

The private equity market

Private equity is an alternative funding source for companies unable or not wanting to access equity capital though a public issue Source of funds
Superannuation funds and life insurance offices

Use of funds
Startups, business expansion, recovery finance for distressed companies, management buyouts Aim is generally to:
improve profitability sufficiently to realise value though an Initial Public Offering (IPO) break up business to achieve return on investment