The stock exchange market in the UK - Essay Example

The stock exchange market in the UK London is globally recognized as the chief financial center of the whole world. Its good reputation depends on the fact that it has world renowned markets. The chief role is played by the Exchange to make London a successful international financial center. The London Exchange meets the various different needs of the companies and investors better than those of any other exchange in the world. As a result of this excellent USP, the Exchange is at present the most successful and thriving global stock market, outpacing all international competition and is a magnet for companies from all over the world. A total of £52 billion was raised in 2006 on the Exchange’s primary markets. £29.4 billion of that raised amount was contributed by 367 companies who had chosen an IPO9 on the Exchange. This amount is greater than NYSE and NASDAQ combined as well as any other equity exchange all over the world. The Exchange was the best choice for IPOs during the very same period. 17% of the total global IPOS chose the London Exchange, the number being way ahead of the New York Exchange. London Exchange continues to draw new listings from the well-established U.S. markets as well as emerging markets like that of Russia, South Korea, and China. (McEvoy, 1977) These impressive numbers are part of a persistent growth pattern. The numbers of IPOs attracted by London have continuously increased and the total amount of capital that is raised by different companies in London markets is growing every year. The access one of London Exchange’s markets has helped companies gain benefits that are so unique that they can’t be gained by any other means of fund raising. It is extremely difficult for growing as well as mature companies to gain new sources of capital like bank loans to carry on with their evolving corporate strategy necessary to keep the company afloat. As is well known, it is joining of a public capital market that helps raise a substantial amount initial and ongoing capital. It also helps to gain benefit from the increased profile and liquidity of the public capital market. Raising public capital in London increases a business’s ability to finance expansion strategies in existing as well as new markets. Raising capital in London also helps to invest in any many different growth opportunities such as acquisitions, mergers, research and development etc.. For a business to be globally successful, it is vital to have access to a market which not only has a lot of capital to invest but a varied investor base as well. In short, companies hugely benefit from a well-established funding source where the capital pool is sufficient enough to meet financing needs of thousands of different companies of different sizes (Papadopoulos, 2011). It is commonly believed by economists and the common public that the London Stock Exchange is as near to a perfect market as there can be. The basis for this belief lies in the fact that the stock and share prices in the Exchange are extremely susceptible to the factors of supply and demand in the market. Another reason for this commonly held belief is also the extremely effective public relations efforts of the well-connected members of the Exchange and the Stock Exchange Council. According to analysts, UK stock market found out that the success of the market depended on the association between the timing of rights issue announcement and the share prices. This observance is furthered by the fact that the stock market in UK is weak-form efficient, while some capital market studies have called the stock exchange more towards being semi-strong-form efficient. Smith (2004) by studying the grain futures market pointed towards semi-strong form efficiency of the stock exchange because of the release of large trader position information. Further studies have compared the share prices after the takeover announcement with the bid offer. It was found that the share prices immediately adjusted to the correct levels. Hence the study concluded that the stock market in the United Kingdom was semi-strong-form efficient. It must however be remembered that the market's ability to efficiently respond to an event like a takeover announcement which is widely publicized and short term in nature does not reflect on the market’s efficiency as is related to long term factors. David Dreman has pointed out that an instantaneous response is not always an efficient one and that the long-term performance of the stock market also needs to be considered before labeling a market efficient. The efficient-market hypothesis (EMH) states that the financial markets are "information efficient". As a result of this efficiency based on information, it is impossible to achieve constant returns that are greater than the average market returns, given the information that is available at the time of the investment. How it all started The advent of industrial revolution brought about the growth of a growing affluent merchant class and the old phenomenon whereby only the wealthy undertook expensive ventures like ship building etc. changed drastically. The total amount of wealth that could be potentially invested into ventures grew at an alarming rate. What was now needed was an efficient way of bringing together the merchants and the investment capital. Hence, the idea of a joint stock company was born. In the joint stock company anyone who had cash to invest could buy shares and were given a proportional cut of profits of the particular venture they had invested in. The next challenge was to come up with a place where everybody could get together so that proposals could be floated and investors could be sought. In the 17th century, the coffee shop around London city's Change Alley was the place where such business activities like fund raising were carried out. The LSE is born The London Stock Exchange was founded in 1801 at Thread needle Street. It operated from there until its location was moved in 2004 to Paternoster Square. It was the industrial boom in the early 19th century that resulted in the growth of the exchange. Also, it was the need for regulating and governing the activities and operations of brokers, the reporting of figures, the payment of dividends, etc. that was vital to the growth of London Stock Exchange. The London Stock Exchange quickly grew on to become one of the largest stock exchanges in the whole world. The actual operations of the Exchange did not significantly change until the late 20th century. It basically acted as a medium where brokers/agents of brokers met face-to-face, published prices, and enacted the deals by the "open outcry" method whereby prices were literally shout out and communication was done by arm-waving gestures to arrive at deals. It was in 1971 that the London Stock Exchange's landmark Stock Exchange Tower began operations, with the time’s largest share trading floors. However, the fast growing progress in computer technology quickly replaced the arm-waving traders. The Big Bang 27 October 1986 was hailed as the "Big Bang Day" because of two major changes that happened on it. Both of these changes were planned to enhance the London Stock Exchange's declining competitiveness against other large exchanges in the world. The two changes were the abolishing of the open-outcry trading which was replaced by computer-matched on-screen trading. The second change was to deregulate the market and moving from the traditional "old boys' network" to opening up trade to modern free-market competition. These changes helped things run more efficiently at a lower operational cost. Through greater transparency, the possibility of price manipulation was vastly reduced. The benefits of these bold changes are still being felt to this day. The increasing growth in technology has enabled online checking of share prices. The decision to buy and sell shares is made via online brokers. The deregulation resulted in lowered prices. Markets Today, the London Stock Exchange makes available two equity markets which have different levels of regulatory requirements and varying safety margins. The Main Market is the one responsible for hosting the FTSE 100 list of the United Kingdom's largest companies along with various other indexes. These indexes include the FTSE 250, the FTSE Small Cap index of smaller companies, and many others. The main indexes that make up the FTSE include the all-share index. The second market that the London Stock Exchange operates is the Alternative Investment Market (AIM). This market has less strict listing rules and is a more affordable listing option for companies. It is usually the listing of smaller companies. However, some of the largest AIM companies have market values into hundreds of millions of pounds. The remaining two markets that are provided by London Stock Exchange include the Professional Securities Market (PSM) and the Specialist Fund Market (SFM). Most private investors never encounter these markets. Functions The four major functions of London Stock Exchange are Fulfilling its time old function which dates back to the days of Jonathan's to provide companies with a medium where capital can be raised by means such as initial public offering (IPO, or "flotation") and by secondary issues of stock. The London Stock Exchange is responsible for providing trading service which help investors to trade with each other shares and different other instruments and commodities using the intermediaries of their brokers and the Exchange's electronic trading systems . The Exchange is responsible for provision of information on share prices and any other information through its Regulatory News Service (RNS). The EDX service of the exchange provides a derivatives market. Like the look? The London stock exchange is a classic example of stock market. Owned by the London stock Exchange group, it is one of the oldest stock markets in the world. London Stock Exchange Group is a public limited company itself which is also listed on the London Stock Exchange and is a part of the FTSE-250 index. Its shares however haven't been a great success over the years despite its paying a steady dividend. The London Stock Exchange is a market for trading long term securities. This is an organization where the stockbrokers and traders can buy and sell shares and security. London Stock Exchange make available services for the issue of redemption of securities along with other financial instruments and capital events which include the payment of income and dividends. All the companies that wish to trade on the LSE are required to be listed on the London Stock Exchange. LSE is developing its market in covered warrants. These covered warrants are basically tradable securities on the LSE. Anyone holding a covered warrant can buy or sell at a specific price on a particular date. The risk factor on covered warrant is exceptionally low. The Exchange is the most important component of the stock market. I must be remembered that the London Stock Exchange does not deal with general public. Over two hundred registered stockbrokers exist and act on behalf of the public. The stock exchange brokers at London charge a flat fee or at times percentage for their services from the customers (Teweles,1998). There are two trading procedures types on the LSE: SEAQ: It is the automated quotation system of the stock exchange. It is a quote driven system whereby the market makers battle amongst themselves through the stockbrokers and the trading is done either by phone or online. SETS: It is the electronic trading service of stock exchange. This system is order driven where the stock brokers automatically trade through the electronic trading book. It eliminates the role of market makers. The electronic trading service is restricted to the FTSE 100 and some companies on the FTSE 250. The SETS deals are done via a broker. At the Stock Exchange, SETS orders are either carried out at the unsurpassed overall price or through the 'execute and eliminate' method which immediately executes or through the 'fill or kill' method whereby trade is done on the precise terms specified or not at all. 'Limit' method is also used which sets prices for trade on a particular amount within a ninety days period. The market is viewed as semi-strong because of share price adjustments to the new information being made public (Smith, 2004) Role of the London stock exchange The London stock exchange basically manages the bond, share and account receivable listings and offers efficient services to and for the share issuers and buyers. Investors get the opportunity to buy and sell from companies of which they are already shareholders of. The Stock exchange plays an important overall role in the economy: It aids companies in raising capital which helps expand business or improve the existing business by selling of shares. It offers a trading platform where brokers from all around the world can buy and sell securities. It helps individual shareholders in disposing off their shares in exchange for money in the secondary stock market. It encourages the savings of inactive funds which in turn help promote business activity which results in a strong economy with high productivity. The stock exchange assists sharing of profits through capital gains. The stock exchange is responsible for ensuring an orderly, fair and efficient market for financial securities. The stock exchange must make certain that prices of shares that are traded are fair and information about quoted firms must be made available to all. It helps the government raise money through bonds. It is a strong indicator of economic strength and development. Stock exchange provides vital information that has the potential of affecting the prices of stock. The stock exchange encourages corporate governance so that the demand of shareholders is satisfied with the help of stringent management standards and efficiency. The stock exchange provides opportunities for investors who have limited funds. The many options mean that the investors can buy whatever they can afford. The stock exchange aids takeover bids and mergers. It offers an excellent opportunity for debt issuers to have access to a large capital pool. It enables investors to easily and quickly sell their securities. The stock exchange is an efficient information service provider. Prices, indications, company’s histories, financial positions, market position are all provided by the stock exchange (London Stock Exchange plc, 2010). The stocks and securities are traded through diverse types of market in the LSE. These markets comprise of the primary market, the secondary market, the alternative investment market (AIM) and over the counter. References Chris McEvoy, (1977) "Economic Efficiency and the Stock Exchange", Management Decision, Vol. 15 Iss: 1, pp.186 – 196. Available at: http://www.emeraldinsight.com/journals.htm?articleid=1669654&show=pdf London Stock Exchange plc. (2010). A guide to AIM. White Page Ltd. Available at: http://www.londonstockexchange.com/companies-and-advisors/aim/publications/documents/a-guide-to-aim.pdf Papadopoulos, P. (2011). Role and Function of Stock Markets: Using the Exemplar of London Stock Exchange and Frankfurt Stock Exchange. GRIN Verlag. Available at: http://books.google.com.pk/books/about/Role_and_Function_of_Stock_Markets.html?id=o2sPe4a89ycC&redir_esc=y Smith, B. M. (2004). A History of the Global Stock Market: From Ancient Rome to Silicon Valley. University of Chicago Press. Teweles, R. J., & Bradley, E. S. (1998). The Stock Market. John Wiley & Sons. Read More