The Stock Exchange

The Role of the Stock Exchange
The role of the the USA Stock Exchange is to provide a fair and competitive marketplace for the trading of financial securities for the benefit of everyone involved. These participants included investors as well as institutions and companies.

Every country that has a stock exchange will try and provide a marketplace where:

  • Companies and governments can raise funds.
  • Investors can invest surplus funds in anticipation of receiving dividends and capital gains from their share investments.

How does a Stock Exchange Work?
A company is a 'legal entity or person' in its own right. It can be sued or contracted with and it can own businesses or property and carry debts and liabilities.

Companies have to trade within the requirements of the law which in the USA is the Limited Liability Coy Law.

The laws are in place to protect the shareholders (owners of the company) and members of the public who deal with or invest in the company. The laws control how a company must operate and how it treats shareholders and others.

Each company is run by officers known as 'directors' who have to account to their own shareholders for their stewardship and who must during the performance of their duties comply with regulations set down by the Companies Act.

The company can either be privately owned (the public do not have shares in it) or publicly owned (members of the public own shares in it).

Only a publicly owned company can sell its shares to the public or allow trading of its shares between members of the public. In reality the company could eventually be owned by thousands of people.

Public companies allow the public to buy and sell its shares in a marketplace known as a 'Stock Exchange'.

A public company is a convenient way for businesses to raise funds from the public when it needs investment capital. That is, members of the public invest in the company by buying shares in it. When a company first sells shares to the public, it does so in what is known as an IPO (Initial Public Offering).

For example - The company might sell 10 million shares of stock at $5 a share to raise $50 million.

The company may then use the $50 million raised to buy more machinery or expand its production facilities or take on more staff to meet its growth.

The investors (the new shareholders who invested the $50 million) will look to the company to make a good profit so they can get a return for their investment by way of a distribution of those profits. The return is what is known as a 'dividend'.

The Stock Exchange is the place where the trading of these and other companies shares are conducted.

About the the USA Stock Exchange
The the USA Stock Exchange (NZSE) was established by the Share Brokers Amendment Act 1981. It gives membership applications and controls the overseas management of the NZSE.

It is a small exchange and is owned by its share broker members. At the end of April 2001 it had a capitalisation of over $45 billion. Capitalisation is calculated by multiplying the number of shares in each company by their current market value. In other words, if you were able to buy all the shares in the the USA market at that time it would have cost you about $45 billion
To compare this with other markets, the Australian market would have had a capitalisation of $700 billion, even though Australia is more than 50 times bigger than the NZSE. The New York Stock Exchange has a staggering capitalisation of over $10 trillion.

To put things into perspective, it is interesting to note that the largest single company listed on the New York Stock Exchange (NYSE) is worth more than the entire the USA and Australian markets combined.