Purpose of Stock Exchange - Literature review Example

1. Stock exchange is defined as a body which acts as a liaison between the people willing to invest in a company and company who is willing to offer the same to the customers in the form of shares, bonds and financial security (Casey, 2012). Stock exchanges can be both virtual and physical and provided different function but the most important is that if facilitates transactions between the company and the person willing to invest in the company. Every company looks towards having an exchange where people are allowed to trade in securities and pruchase the securities of company they want to have. This has resulted in the development of stock exchanges where different companies tie up with them to ensure that people are able to purchase securities and invest in the company. Some of the purpose apart form being a liaison is It helps to increase the wealth of the company as companies who are looking to finding out a source to raise capital can use the stock exchange to get their shares listed and ensure that the money is raised from the people from the market (Casey, 2012). This thereby ensures a source of financing for the company as it is able to find investors without having to look for money through lenders. This also helps to provide an opportunity to raise money in the future as wealth of the company can further be increased depending on the business situation. It also helps in forecasting as using the stock exchange is a place where person trade in securities so it helps the forecaster to under the sentiments of the people in the economy as well as in the entire world which thereby helps to ensure that the future forecast can be estimated (Casey, 2012). This thereby helps the economist to understand the manner in which the economy will perform and based on the forecasted parameters developments are possible which will facilitate the business in building a famework through which the business process is developed. It helps the investor to plan their savings despite the risk involved in the market. Proper planning and executing the duties will ensure that the chances of loosing money reduce and the investors are able to magnify their savings to be used for future purpose (Casey, 2012). This can be achieved by proper planning and looking towards investing in different securities having different risk so that the overall risk and return balance is developed which will help the investor to be able to ensure safety at the same time provide an opportunity to be able to multiply the returns It helps to value the share prices of the company correctly as without looking to trade in securites identifying the actual market value of the share will be difficult. This problem is reduced to a large extent by ensuring that stock exchange allows finding out the correct valuation of the securities (Casey, 2012). This thereby helps the company in correct valuation and helps to determine the current value of the company. This has its advantage as it can be used in different situation to be able to provide different benefit to the organization so that the business is able to grow. 2. Company which has issued ordinary shares is Telstra Corporation Limited and the ASX code is TCL Company which has issued preference shares is BHP Billiton Limited and the ASX code is BHP Company which has issued convertible notes is Philips River and the ASX code is PRH 3. Equity Shares are ordinary shares which are issued by the company and people who purchase equity shares have a right in decision making receive dividend out of the profits made by the company. The equity shareholders have a risk as during winding of the company they will be paid only after all the liabilities of the company has been paid. Since, the shareholders have a right to vote they are allowed to take part in different meetings and vote for their rights (Equity Shares, 2012). This will thereby ensure that the business is able to magnify the chances of financing their business and will have an opportunity in the future where they can use the same medium to finance their business projects. This thereby helps to develop a framework which will help to provide better results and ensure that the equity shareholders are able to provide better strategy for the future. Preference share are similar like equity share and receive dividend out of the profits of the company. Preference shareholders are not allowed to vote and have no voting rights. This differentiates them from equity shares as they are not allowed to take part and use their voting rights. In addition to it preference shareholders are paid dividend before the equity shareholders are paid as they have a preferential right over dividend. Also when the company winds up the preference shareholders are paid before the equity shareholders are paid thereby reducing the risk slightly as compared to the equity shareholders (Preference Shares, 2012). This also ensures that the business through this policy is able to ensure that the debt for the business doesn’t increases as it provides them an opportunity to use it as a source of future financing. Convertible Notes on the other hand is a mix of both debt and equity. This means that convertible notes are issued as debt which bears interest and the rate of interest component is low for a fixed period which is stated on the convertible note. After the expiry of the term convertible notes are converted into equity shares. This provides the holder of the bonds equal rights like the equity shareholders but only after the period at which the bond has been converted into shares can be notified. This also helps the company as it ensures that the liability of the company automatically vanishes after a period of time and becomes to be treated as an equity shares. Convertible notes thereby provide the investor with different strategy and ensures that the investor benefits (Convertible Notes, 2012). 4. The buyer or seller of a security has to incur different cost while entering into a transaction. The first cost which the buyer or seller incurs in the brokerage cost which is paid to the intermediary who helps to complete the transaction of buying or selling. This cost varies according to the broker who is involved in carrying out the transaction. Along with it the buyer or the seller has to incur other cost like service tax which is paid on the brokerage that is paid. In addition to it educational cess has to be paid as well (Kapil, 2010). The buyer or the seller has to indulge in all the taxes irrespective of the transaction involved and has to even pay taxes to ensure that the operations are carried out completely. The buyer and seller of the security also have to pay securities transaction tax which varies upon the volume of shares or securities which are sold or purchased. The buyer or the seller than has to pay exchange levy tax which also depends on the volume of securities that is either purchased or sold. Finally, the buyer or the seller pays stamp duty which also depends on the volume of transaction that has been involved (Kapil, 2010). The different type of taxes which both the buyer and the seller has to pay on the securities results in the price of the share to rise up and changes according to the volume of transaction which is involved. Even transactions with small volume has a certain tax rate so irrespective of the size taxes have to be paid both by the buyer or seller of securities. Thus, the buyer or the seller pays different type of taxes and duties on the securities that has been purchased or sold. 5. Yes, there are chances that the investor might loose his investment in case of equity shares and preference shares when the company doesn’t have a liquidity position to be able to pay them. Convertible notes also have a risk associated with them only when they are converted into equity shares as they will then be treated as ordinary shares and will have all the risk of an ordinary share. This provides the buyer of convertible notes an added advantage as they continue to receive interest for a fixed period of time and after the expiry of the period becomes the owner of the business and receives dividend from the profits of the business. This also results in the transformation of risk as convertible notes when transferred into equity shares has all the risk that the equity share has. In case the company goes bankrupt then the payment will be made in the following order Firstly the convertible notes will be paid followed by preference shares and finally the equity shares (Equity Shares, 2012) 6. The main factor which guides an investor in choosing an investment avenue is the risk appetite that person has. Financial decisions taken by a business or an investor involves risk and it is not possible to think of a way to eliminate risk but can be reduced by developing certain strategies. Investors don’t prefer risk but are unlikely to avoid it thereby looks towards ways which ensures a proper match between risk and return. Investors while taking a financial decision want to know the reason for the risk, the manner in which it will be measured and strategies which will help to reduce risk. Risk and return are the fundamentals of finance as it helps to evolve the decision regarding financing of different instruments. Investors look towards high return for high risk bearing securities but the situation could in the actual scenario turn otherwise. This would mean that the investors instead of gaining money on the high risk instruments loose money. Thus, risk is present in every outcome especially the ones in which the customers don’t know the possible outcome (Baird and Thomas, 2000). This has made investors look towards creating a portfolio of different assets having different degree of risk and return so that on the overall basis the risk and return are both controlled and the investor is able to earn a good income on the invested sum. Different factors guide an investor towards making a decision but on the overall basis the decision taken by the investor is rational and looks toward sincreasing the value of the invested sum. 6. I will look towards investing in equity and preference share as the time period for the investment is very low. Since I am looking towards investing for a month the highest profit which I can expect will be from investing in equity and preference shares. I know that there is risk involved in investing in equity and preference shares but the upside gain is also high. Since I have the risk appetite to go further I would look towards these securities. Also, the fact that the economy is improving it provides and opportunity to ensure that the return will be high. This in addition to the fact that the economy is growing will help to improve the overall business prospect and will provide an opportunity to be able to ensure maximum return on their investments. Investing in convertible noted won’t be a very good option as the investment is just for a month which would mean that I only earn interest for a month and will thereby limit the potential to earn higher income. References Baird, I. and Thomas, H. (2000). What is Risk Anyway ? Using and Measuring Risk in Strategic Management, Greenwich, CT : JAI Press Inc. Convertible Notes. (2012). Convertible Notes. Retrieved on September 8, 2012 from http://www.businessfinance.com/convertible-note.htm Casey, R. (2012). Purpose of Stock Exchange. Retrieved on September 8, 2012 from http://www.ehow.com/info_8049486_purpose-stock-exchange.html Equity Shares. (2012). What is an equity share? Retrieved on September 8, 2012 from http://www.indiastudychannel.com/resources/109385-What-an-Equity-Share.aspx Kapil, T. (2010). Understand charges other than Brokerage when Buying and Selling Shares. Retrieved on September 8, 2012 from http://enrichwise.com/2010/03/28/understand-charges-other-than-brokerage-when-buying-and-selling-shares/ Preference Share. (2012). Type of Preference Shares. Retrieved on September 8, 2012 from http://financelearners.blogspot.in/2011/03/types-of-preference-shares.html Read More