The Sharemarket

What is a Sharemarket?
The sharemarket comprises of 2 main markets:
  1. Primary - The first is a primary market where companies or the government issues shares in order to raise capital to expand operations or to carry out other objectives. They take on a wide range of shareholders and raise investment capital by issuing an investment statement (known as a prospectus), through a broker. The broker who organises the capital raising is known as the organising broker or the underwriting broker.

  2. Secondary – The second is a secondary market, which is a central market provided by the stock exchange and here investors are able to trade in shares or securities in the normal way.

Functions of a Sharemarket
A sharemarket (also known as a stockmarket) has 2 main functions:

  1. It enables people to invest in a company.
  2. It provides a means for people to buy and sell shares between themselves as shareholders and investors.

1. Invest in Companies
This function provides companies with a way of issuing shares to people who want to invest in a company. For example, a company may want to expand its operation and may need to purchase substantial equipment. It therefore needs to raise money through the sharemarket. It issues a prospectus (an information document) fully informing potential investors about their company. The prospectus informs on many areas including the company’s future financial prospects.

The potential investors are invited to invest money in the company by taking shares in it. They do this by buying shares in the company and effectively having part ownership of it. This usually happens when the company is 'floated' (i.e. it is put on to the sharemarket).

If the company then operates at a profit, the shareholders will benefit by receiving income by way of dividends (in the form of cash or by more shares at no cost), or through the growth in the market value of the shares. On the other hand, if the company doesn’t do well, the value of the shares could drop, with reduced or nil dividends payable. If investors quit and cash in their shares, they would probably lose money.

2. Marketplace for sale and purchase of shares

The second function of the sharemarket is related to the first and is really a means of providing a marketplace or venue for shareholders to buy and sell shares from one another relating to the shares that each holds in the various companies.

How the Market Works
The market is the place where the forces of supply and demand are expressed and translated into the daily share price belonging to the shares of each company listed on the stock exchange. This market is called the sharemarket. It is like the age-old marketplace where people gathered to buy, sell and trade goods and services. Those markets included bartering, where the exchange related to the owner of one product exchanging their products with those owned by someone else.

The sharemarket performs exactly the same function. It is a place where people can buy, sell or exchange their shares in various companies. The old traditional marketplace involved the trading or exchange of food, clothing, tools, animals, etc. The modern day markets do exactly same thing, except that the medium of exchange is cash rather than goods.

The sharemarket involves the trading of company shares between people of all races and all walks of life, whether they be poor or wealthy, educated or uneducated.

Basics of a Stock Market
If I am a private citizen who owns a business and I am selling my business to other private citizens in the community, I might do the whole thing by word or mouth or by placing an ad in the newspaper. This makes selling the shares easy for me. However, it creates a problem for investors who also may want to sell their shares in the business. The seller has to go out and find a buyer, which can be difficult.

A stock market solves this problem.

Companies are bought and sold in a stock market, which is also known as a stock exchange. The New York Stock Exchange (NYSE) is an example of such a market. In your neighbourhood you have a supermarket. The supermarket sells food. The reason you go to a supermarket is because you want to go to one place to buy all the different types of food available.

The NYSE is a supermarket for shares (or stocks). Think of the NYSE as a big room where everyone who wants to buy and sell shares does their buying and selling. The exchange makes buying and selling easy. You don’t have to get in an aeroplane and travel to New York to visit the NYSE. Simply call a stockbroker who will do business at the NYSE for you.

Because all the buying and selling is concentrated at the one place, (the stock exchange) it allows the price of all the shares to be known every second of the day. This means investors can watch as prices fluctuate based on news from the company, economic situation, media report and other factors. Buyers and sellers take all these factors into account when doing their transactions.