Fundamentals of Financial Services
Secondary Markets
Lesson Objectives
By the end of the lesson:
• Everyone MUST be able to:
1. Explain the function of a stock exchange
2. Explain the purpose of a stock exchange
3. List the following stock market indices and which markets they
belong:
• Dow Jones Industrial Average
• S&P 500
• FTSE 100
• DAX
• Hang Seng
• Nikkei 225
Stock Exchanges
A stock exchange is simply a place where financial instruments can be bought or sold.
They began simply as meeting
places where investors gathered to
discuss companies and their shares,
and to trade shares
As they became more formal,
these meeting places became the
trading floors of exchanges, where
traders made deals face to face.
Today, many of these exchange floors
have been replaced by sophisticated
electronic dealing systems run on
computer systems that now operate in
major cities throughout the world.
Stock Exchanges
A stock exchange is simply a place where financial
instruments can be bought or sold.
Financial
Instruments
Cash Sellers
STOCK EXCHANGE
Buyers
Financial
Cash Instruments
STOCK EXCHANGES
• Equities can be bought and sold on the
following world famous exchanges:
– New York Stock Exchange (NYSE)
– London Stock Exchange (LSE)
– Abu Dhabi Securities Exchange (ADX)
– Singapore Exchange (SGX)
– Colombo Stock Exchange
– Johannesburg Stock Exchange (JSE)
– Tadawul (Saudi Arabia)
• Most countries have their own stock
exchange.
• An exchange is like a market place
where buyers and sellers “meet” to
trade in equities.
• Most of these transactions are now
completed electronically
.
.
Case Study: Roger
Roger holds shares in an international oil company that he is considering
selling. He goes to the nearest stock exchange, where he finds other buyers
and sellers of shares have gathered and he is able to find someone who is
willing to pay a price that he considers reasonable for his oil company shares.
Roger will probably use the services of a member firm, such as a bank, to put
his wish to sell the oil company shares onto the exchange’s computer system.
The exchanges system may have a number of interested parties that have
already expressed a wish to buy the oil company’s shares.
As long as Roger is willing to sell at the same price that a purchaser is willing
to buy, the exchange's system will match Roger’s order to buy with the
appropriate order to sell.
The exchange will then make arrangements to transfer ownership of the
shares to the new owner and transfer the cash proceeds to Roger.
FUNCTION of Stock Exchange
Facilitate trading in financial instruments, particularly shares – enabling sellers to sell their
investments and enabling interested buyers to purchase investments.
IPOs
Stock exchanges trade shares in listed companies.
Generally, to become a listed company:
▪ The company needs to be well established
▪ The company needs to be large enough to attract sufficient trading in their shares
INITIAL PUBLIC OFFERING (IPO)
A company goes public when shares are offered to the public for the first time
Raises Money Increases the Increases liquidity
The Facebook IPO raised around
$16 billion: $7billion for the
public profile and After an IPO, shares are
much easier to buy or sell
company and the other $9 awareness of the as they are now traded on
billion for some earlier investors
to sell some, or all, of their
company a stock exchange
shares.
Stock Market Indices
Measures aggregate price movements of companies’ shares on an exchange
Provide a snapshot of how share prices are performing in a particular stock market, or across
several markets.
Single Global
market indices market indices
Measures price movements of companies’ Measures price movements of companies’
shares listed on one stock exchange shares listed on various exchanges
internationally
▪ Investors can gauge the overall performance of the market
▪ Smoothens out anomalies and provide a consistent picture of the mood across the market.
▪ Provides a benchmark for investors - assess whether their portfolios of shares are doing better
(outperforming) or worse (underperforming) than the market in general.
Stock Market Indices Examples
UK FTSE 100 China
Hang Seng
‘Footsie’
Largest 100 UK companies Index
Covers 70% of the UK market 58 stocks
value
USA
Germany
Dow Jones
DAX
Industrial Average
(DJIA) 30 stocks
A narrow view of the US
stock market
30 stocks
USA Japan
Nikkei 225
S&P 500
225 stocks
A wider view of the US
stock market
500 stocks
Research Activity
Which index (or indices) are the following 15 companies included within?
Company Name Which index/indices?
Adidas
Apple
Barclays
BP
Canon
Cathway Pacific Airways
Coca-Cola
Exxon Mobil
Honda
HSBC
McDonald’s
Sharp
Sony
Toyota
Volkswagen
Plenary
Have you met the
learning objectives?
Use your learning
objectives sheet to
assess your learning.
