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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...