The main function of stock markets is to provide a marketplace for the exchange of securities, including stocks and bonds. This applies to stock markets globally, including the South African stock market. In South Africa, the primary stock exchange is the Johannesburg Stock Exchange (JSE). The JSE is one of the largest stock exchanges in Africa and serves as the platform for trading various securities.
The South African stock market operates similarly to other stock markets worldwide. It provides a platform for companies to list their stocks and bonds, allowing investors to buy and sell these securities. The JSE offers a range of financial instruments, including equities, bonds, exchange-traded funds (ETFs), and derivatives.
With approximately 630,000 companies offering their shares for sale in the public market globally, the stock market represents a vast marketplace. In terms of market capitalization, the major stock exchanges hold around $70 trillion worth of listed companies’ value. It’s important to note that this figure includes global stock markets collectively.
Additionally, stock exchanges are significant players in the bond market. The bond market is even larger than the equity market, estimated to be around $100 trillion globally. This demonstrates the immense scale and importance of both equity and bond markets in the financial world.
Considering the size and reach of the stock market, companies contemplating going public need to meet specific requirements. These requirements typically include demonstrating a certain value and number of shares issued, as well as maintaining a minimum profit over the preceding years. Stock exchanges also expect companies to adhere to corporate governance standards and provide transparency by opening their books for public scrutiny.
In South Africa, the JSE plays a crucial role in providing a platform for companies to raise capital, giving investors opportunities to participate in the growth of businesses and economies. The stock market serves as an indicator of economic health and investor sentiment, playing a significant role in the overall financial landscape of the country.
Listing Your Company on the Stock Market
There are some significant companies that choose to remain private and do not offer shares of their company to the public. In contrast, most large companies and many medium-sized companies opt to list their stocks on stock markets. The primary purpose of stock markets and stock exchanges is to provide liquidity. In the case of private companies, buying and selling shares in the company is extremely difficult, as the shares are held by the private ownership and are only given out for specific purposes, such as when they seek investors.
Selling privately held stock is also uncommon since there isn’t an established market for it. While it is possible to create a market for private stock, the typical means of offering stock for sale is by listing it on a public exchange. This process allows current stockholders to convert their stock into cash, providing them with liquidity for other purposes. Therefore, companies list their stock on stock markets and begin with an initial public offering (IPO), which is the only time when the company directly collects the price for the stock issuance. This primary market is followed by the exchange of stocks between traders on the secondary market.
From time to time, a company may issue new shares to collect additional funds, thereby increasing its market capitalization, which represents the total value of its outstanding shares. Conversely, a company may also engage in share buybacks, reducing its market capitalization. When market capitalization increases, the value of outstanding shares decreases due to dilution. The number of outstanding shares represents ownership in the company, and as the number of shares increases, the percentage of ownership per share decreases.
Conversely, when a company buys back its stock, it aims to increase the value of its outstanding shares, although the market ultimately determines the price of a company’s shares in the secondary market based on what investors are willing to pay. Valuation in the secondary market is primarily based on the price of the last trade. However, this assumption doesn’t consider the practicality of selling the entire amount of stock at once, as bid prices are usually for smaller quantities, while companies typically have millions of shares outstanding. If all the outstanding shares were offered for sale simultaneously, it would drive the price down significantly, resulting in only a fraction of the market capitalization being realized.
Although market capitalization doesn’t precisely measure the total value that would be obtained from selling all outstanding shares, it does indicate the value that investors assign to the shares in the market. Market capitalization is calculated by multiplying the total number of outstanding shares by the market price per share. This calculation is useful in determining the overall valuation of a company and its comparison to other companies in the market.
Trading on the Stock Market
Indeed, the stock market serves as a platform that brings together buyers and sellers of stocks, facilitating the exchange of securities. Without the stock market, the process of buying and selling stocks would be inefficient and illiquid, requiring individuals to individually advertise their intentions to buy or sell stocks, which would be impractical given the vast volume of stock transactions that occur daily.
The stock market provides a highly organized format for trading stocks, ensuring efficient and orderly transactions. This organized framework is essential, considering the hundreds of billions of dollars’ worth of stocks that change hands on a daily basis. Traders rely on the stock market to match their buying and selling orders, streamlining the process and enabling liquidity.
To enhance liquidity further, intermediaries known as market makers play a crucial role. Market makers hold a certain inventory of stocks in the market they operate in, enabling them to facilitate trades and add liquidity to the market. They buy and sell stocks from individuals and maintain an inventory of stocks for trading purposes.
When actively traded stocks are involved, buyers and sellers will observe bid and ask prices. Market makers typically post small amounts of shares at a given price, while larger quantities may be available at different prices. The difference between the bid and ask prices is referred to as the spread. Market makers and other participants who make markets profit by capturing the spread, which represents a small amount per share. While the profit per share may be small, it accumulates significantly over the course of numerous trades.
Overall, the stock market’s organized structure, supported by market makers and other intermediaries, ensures efficient trading, liquidity, and price discovery. It allows investors to easily buy and sell stocks, contributing to the functioning and vitality of the financial markets.
The Roles Stock Brokers Play
Brokers play a crucial role in the stock market by assisting individuals throughout the trading process. They take orders from clients, ensuring that trades are executed and settled properly. Settlement occurs a couple of business days after the trade, during which the actual exchange of money takes place.
In addition to facilitating trades, brokers may offer margin trading services, allowing clients to buy stocks by putting up a certain percentage of their own funds and borrowing the rest. Generally, trading on margin with stocks requires clients to provide at least half of the funds. Margin trading with certain other types of securities may allow for higher leverage. However, if the position moves unfavorably, individuals may face a margin call, which could lead to the sale or purchase of stocks to settle the position and prevent further losses.
Historically, stock brokers also provided advice to their clients, as information about stocks and the market was not readily available to the general public. However, with the advent of the internet and easy access to information, many individuals now make their own trading decisions. This self-directed trading has gained popularity, offering convenience, accessibility, and significantly reduced transaction costs. People can now place trades online, and some even have direct market access software, enabling trades to go directly to market makers. They can also access software tools to assist in decision-making and gain detailed market data beyond basic bid and ask quotes, such as volume and price information.
While self-directed trading has its advantages, it’s important to recognize that trading stocks requires skill and knowledge. Some investors may lack the necessary information and expertise to trade effectively without professional guidance. Nonetheless, self-directed trading has empowered many individuals to participate in the stock market and other securities markets.
The stock market plays a vital role in enabling the trading of stocks, providing a platform for efficient transactions. It continually evolves to meet the needs of market participants, ensuring that the market operates smoothly and effectively. The stock market’s efficiency and accessibility contribute to its importance in the financial world.
