Stock Exchange And The Type Of Security In Commerce
THE STOCK EXCHANGE – To establish themselves, to modernize and to expand, business organizations require finance, Banks loans are an important source of this finance. In Nigeria financing of industry and commerce has also been in the form of a partnership between local and foreign companies. Regional governments have also provided funds. To a small extent, Nigerian investors have also made finance available; this is where the stock exchange in Lagos becomes involved.
Public limited companies issue shares to raise capital or finance. The new shares, also called securities, are advertised in so-called institutional investors, such as insurance companies and pension funds, who buy a lot of shares, are contacted to see if they are interested in them. This is referred to as placing shares. The third method of issuing shares is to offer them to the existing shareholders by way of rights or bonus issues.
The share capital so obtained is then invested in the firm. It is not returned to the shareholders; the only way they can attempt to get their money back is to sell their shares to someone else. The stock exchange is simply the marketplace where existing shares are bought and sold.
Stockbrokers act on behalf of the shareholders, Jobbers work at the stock exchange and specialize in dealing in certain types of shares. A broker will approach the jobbers dealing in the shares in which his client wishes to trade. The jobbers will then give two prices, a lower one for buying and a higher one for selling. The broker will return to the jobber who offered the best quotation and will then state whether he is buying or selling shares on behalf of his client.
Shareholders are the owners of firms They, therefore, receive a share of the firm’s profits in the form of dividend payments in proportion to the number of shares held. The more profit a company earns the more the owners, ie the shareholders, are likely to receive.
TYPES OF SECURITIES
1. Ordinary shares These are the most common type of shares issued by companies. They usually carry voting rights, such as for the election of directors. Shareholders who hold ordinary shares only receive a dividend if the company can so afford to distribute its profit. There is no obligation on the company to do this every year, nor to distribute any given amount Additionally if the firm is not doing well the value of its shares could fall to below the price paid for them by the existing shareholders.
2. Preference shares These carry a guaranteed rate of return. When distributing its profits a company pays dividends to its preference shareholders first. Ordinary shareholders receive the remainder, which can be at a higher or lower rate. Ordinary shareholders are thus said to take greater risks but can obtain larger dividends than other investors if the company in which they have shared is doing well. Like ordinary shareholders, the holders of preference shares take some risk because, if the company they have invested in does badly, then the value of their shares will fall even though the dividends will not.
3. Debentures Unlike shares these are a form of loan stock. Holders of debentures have no voting rights but receive a fixed rate of interest and, usually, guaranteed repayment at a future date. They are thus the least risky of the three types of investment mentioned so far.
4. Government stock In countries where there is a stock exchange the government can issue stock to obtain finance in order to meet its expenditure requirements. Such stocks can be attractive investments as they bear fixed rates of interest and maybe repayable at a fixed future date. The Nigerian government has made several issues of government stock but these have largely been taken up by the Central Bank. Local government and other public bodies can also issue securities to raise finance; these, like government stock, can change hands at a stock exchange.