- What is a Stock Exchange?
A stock exchange is a kind of a market. To understand what is a stock exchange, we must first know the definition of a market. A market is any place where buyers and sellers get together for the sale and purchase of goods. So carrying on with this definition, we can define the stock exchange as a specific market where *shares are bought and sold. Shares are also known as securities.
*To understand this topic, you must have some information of what a share is. You can either google it, or check out our tutorial ‘Types of Business Units’.
- How the Stock Exchange works?
The stock exchange is no-entry zone for the general public. So if a member of the public wishes to buy or sell some shares, they must first contact a share dealing firm (or broker) which is associated with that Stock Exchange (is a member of that stock exchange).
A member can contact the broker for advice on stocks and shares, and also if he wishes to buy or sell his/her shares. There are many brokers/firms who are registered with the Stock exchange, and people can approach them for their services. (Even some Marks and Spencer stores and large supermarkets offer share-dealing service in the UK!)
Brokers buy and sell shares for the public for a fee known as commission. For example, a customer might wish to buy 1000 shares of the Telenor company, at no more than Rs.100 a share. The broker and customer will agree a commission to be paid to the broker for undertaking the work. For example, this might be a charge of 2% of the total cost of the shares. The broker will now try to buy shares of Telenor company, at the lowest possible price, so that he can make maximum profit. For e.g he might be able to fetch those shares for Rs.80 each, while the customer is ready to pay Rs.100 each.
- Share price indices
Like the price of any other commodity, share prices reflect changes in market demand and supply. For example, if a company announces poor profits, shareholders may want to sell their shares because they will receive a poor *dividend. (*A dividend is the share of profit a shareholder receives from the profits of that company. It is proportional to the number of shares a person holds.) However, a company that wins a significant customer order or announces a merger with another company to increase market share, may cause demand to rise for its shares. Movements in share prices can therefore, reveal much about how well the companies are performing.
Here are some pics of the Karachi Stock Exchange:
- Speculating on share prices
People and financial institutions can make money on the stock market if only they can guess correctly which way the shares prices are likely to move in the future. Attempting to make money from buying and selling shares in the hope their prices will change is called speculation.
We can categorize people and their behaviours into 3 categories:-
People and firms who buy shares in the hope that there price will rise so that they can sell them at a profit are called bulls. The stock market is called bullish if share prices are rising in general.
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 are called bears. When share prices are falling the stock market is called bearish. ‘Bears’ buy the shares back despite their falling prices because they believe their prices will rise again in the long run and that dividend payments from company profits could be good.
People and firms who apply to buy up newly issued shares in the hope their prices will rise quickly after dealing begins are called stags.
Now you might be able to understand, why there is a statue of a bull outside Islamabad Stock Exchange!
Q1. How can a person buy/sell shares in the stock exchange?
Ans. By contacting a broker or a firm which is registered with the stock exchange.
Q2. Hassan : “I am ready to buy PTCL’s shares from the stock market, because I know their price will be touching the sky in a month’s time! ”
After reading Hassan’s statement, how would you describe his behaviour?
Ans. Bearish. Not stag because he isn’t buying new shares. New shares are never sold in a stock exchange. New shares are bought from the company itself.