Stock exchanges allow brokers to buy and sell shares on behalf of investors. Trading can be business-to-business between large brokers or business-to-consumer for individual investors. Brokers charge a commission to buy and sell shares from market makers who create liquidity. Share price indices track the average price of shares in companies to monitor market performance. Speculators hope to profit from rising or falling share prices by buying and selling.

1. The Stock Market
Continues...

2. How a Stock Exchange Works

Stock exchanges are not open to the general
public.

If you want to buy/ sell shares, you need to
contact a dealer (broker) that is a member of a
stock exchange.

Banks now offer this service, too.

You can also buy and sell shares over the
Internet through online brokers and banks.

3. How a Stock Exchange Works

Trading in the financial markets can broadly
be split into two groups:

Business-to-business (B2B) trading. This is
often conducted on exchanges between large
investment banks and brokers trade directly
with each other. It often involves large
amounts of securities.

4. How a Stock Exchange Works

Business-to-consumer (B2C) trading.
Individuals buy and sell relatively small
amounts of stocks and shares. Other
institutional clients (e.g. hedge funds, fund
managers or insurance companies, trading far
larger amounts of securities) buy and sell from
brokers or "dealers", who act as middle-men
between the clients and the B2B markets.

5. How a Stock Exchange Works

Brokers will buy and sell shares for a fee
known as commission.

Example: You want to buy 1,000 shares in
Google at no more than $10 a share.
You and your broker will
agree on a commission of
1% of the total cost of the
shares to be paid to the
broker for undertaking the work.

6. How a Stock Exchange Works

The broker will attempt to buy shares in
Google at the lowest possible price from other
firms of brokers called market makers who
place an order on a stock exchange's
computerized share-dealing system.

Market makers are special brokers or dealers
who create the market in shares. They are
always willing to buy and sell shares with other
brokers or dealers. They buy at a low price
and sell at a high price to make a profit.

Motto: Buy low, sell high.

7. Share Price Indices

Share prices are affected by supply and
demand like any other products.

If a company is not making profits, the
shareholders will not get a good dividend.
Hence, they might sell their shares. As a
result, there are too many of the company's
shares in the market and nobody wants to buy
them, thereby driving the price of the share
down.

8. Share Price Indices

If a company is making profits, the
shareholders will get a good dividend. Hence,
they will not want sell their shares. As a
result, people who want to buy the company's
shares will have to pay higher prices for the
shares.

Changes in the market prices of shares can
reveal much about how well different
companies are performing.

9. Share Price Indices

Investors in shares can watch how share
prices are changing over time by monitoring
the prices of shares in individual companies or
by tracking a share price index.

E.g. S&P Global tracks the average price of
shares traded in 100 of the largest MNCs that
are traded on different stock exchanges
around the world.

10. Share Price Indices

Most share price indices are national indices.

A national index tracks the average prices of
shares traded on one or more of a country's
stock exchanges.

Example: The Dow Jones Industrial Average
Index provides an up-to-date average market
price on the NYSE of the shares in 30 of the
largest and most widely held public companies
in the USA.

11. Share Price Indices

Most regularly quoted stock market indices
include the following:

The S&P 500 Index in the US

The French CAC 40

The German DAX

The Japanese Nikkei 525

See Handout

12. Speculating on Changes in
Share Prices

Speculation: attempting to make money from
buying and selling shares in the hope their
prices will change.

Motto: Do not put all your eggs in the same
basket.

13. Speculating on Changes in
Share Prices

Bulls: people and firms who buy shares in the
hope their price will rise so that they can sell
them at a profit.

Bullish: the stock market
is bullish if share prices
are rising in general.

14. Speculating on Changes in
Share Prices

Bears: people and firms who sell shares in the
hope their price will fall so that they can buy
them back later at much lower prices.

Bear market: when share prices are falling the
stock market is called a bear market.

People buy the shares back despite the falling
prices because they believe the prices will rise
again the long run and that dividend payments
from company profits could be good.

15. Speculating on Changes in
Share Prices

Stags: people and firms who apply to buy up
newly issued shares in the hope their price will
rise quickly after dealing begins.

16. Listed Companies

Not all companies can issue shares of stock.

In many countries, the government require
that companies register before being allowed
to issue and trade shares on exchanges.

After they have been approved, they can then
issue and sell shares. They are then known
as listed (quoted) companies.

17. Listed Companies

In some countries, a listed company may also
be allowed to trade debt securities rather than
shares on some type of exchange or market.

Example of a debt security is municipal bond
issues, various types of collateralized
securities, or even government bonds.