Top 6 Business

Topic 6: Stock Exchanges

Dr Jie Wen

Learning outcomes

At the end of this lecture, students should be able

to:

•Evaluate the role and functions of stock exchanges

• Discuss the efficiency of markets

•Understand the importance of the stock exchange

microstructure

Origins of Exchanges

Structure of a corporation

• Started in Ancient Rome, but only started to

proliferate in 19th century

• NY law of 22nd March 1811 was transformative

• Shareholders vote to elect a Board of Directors

• AGMs to vote on important business

– in particular to hire/fire CEO

• BoD meets more regularly

•“Duty of loyalty” to shareholders

•Responsibility, not high pay, is the guiding principle

Meaning of equity

• Origins of word “equity”

• Equity security represents ownership

– entitled to dividends when earnings are

distributed

– entitled to assets if company in liquidation (AFTER

creditors are paid)

• Shareholders are equal and have one vote per

share (“shareholder democracy”)

Equity types

• Ordinary Shares

 Represent the equity capital of the firm and are a means of

raising long-term finance to run business

• Limited liability

 Means that investors are liable for the company’s debt only

up to amount they invested

• Preference shares

 Offer fixed rate of dividend

 The dividend is paid before ordinary shareholders

 No voting rights

Some unusual types of shares

• Non-voting shares or reduced voting shares

• Deferred ordinary shares

• Golden shares

A successful exchange is…

• A “Fair Game”

– One participant can’t benefit at the expense of others

• Well regulated

– avoid abuses, negligence and fraud

• Reasonably cheap

– For small investors, as well as large orders

• Efficient/Liquid

– The larger the number of buyers and sellers, the

greater the likelihood of efficient prices

Benefits of a well-run exchange

1. Firms can find funds and grow

2. Capital is allocated to best projects

3. Valuation of...