The knowledge about shares and stock markets – 2

Thursday November 7 2019

 

How can a society benefit from the existence of stock markets in its midst? How can businesses and government projects and individuals and a collective community optimize the use of stock markets? How would it benefit from such optimal use? In trying to answer these questions (albeit partly), in the last week’s piece I provided the historical context of stock markets enlightening to us on how far the world of stock markets have come and how fast we have to run to catch up.

I wrote about how stock markets dating back in the 16th to 18th century were used to facilitate the financing of slave trade as an enterprise.

How economic entities in this business were organized and financed by investors using stock markets.

How private slave trading companies sold shares in the Amsterdam, London, Paris stock markets to finance slave trade enterprises, while providing an opportunity for people looking for better investment returns to buy shares of such enterprises.

The context being, yes the concept of stock markets and the role it plays, as far as matters of savings, investments, resources mobilization, financial literacy and inclusion, collective ownerships, inclusive economic empowerment, risk management, etc are concern -- has been relatively for long, and yes there are many business ideas and social-economic projects opportunities have accessed public markets for funds to actualize and enhance their undertakings.

However, for us, so far, we have not been able to learn to unleash the power of collective ownership of enterprises and assets through financial instruments that are listed in the stock exchange for tradability and liquidity and wealth creation.

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As a result, we have an economically weak stock market, not optimally utilized by both the private and public sector, without adequate supply of securities and has just but a few investors who benefits on its existence.

Because of this – plus other factors, we remain a less inclusive economically growing society. So, what are the benefits of the stock market in a society? Read on:

Promotes capital formation

The stock exchange provides companies with the facility to raise capital for business enterprises expansion through selling shares, and bonds and other financial instruments to the investing public.

Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit, stock exchanges are the other common form of capital raising used by companies and entrepreneurs. Thus, the stock exchange plays an important role in capital formation in an economy.

Facilitates mobilizes savings for investment

When people draw their savings and invest in shares and bonds (through IPOs or the issuance of new shares or bonds of an already listed company), it usually leads to rational allocation of financial resources, because funds, which could have been consumed, or kept idle are mobilized and redirected to facilitate companies’ finance their enterprises. This promotes business activity with benefits for other several economic sectors, resulting in stronger economic growth and higher productivity levels of firms.

Facilitates companies’ growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against price volatility, increase market share, acquire other necessary business assets, etc.

A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition. Apart from acquisition model of growth, even in organic growth, companies use stock markets to raise capital through IPOs and listing of these instruments in the stock market to enable access to liquid by investors.

Enhances government funds for development

The government can undertake projects of national importance and social value by raising funds through sale of its securities to the investing public, but with the intention to list the said instruments on a stock exchange, which is a promise of existence of liquidity and fair price discovery.

At various levels the Government may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates or building bridges, roads, ports, airports, health facilities, education facilities, etc by selling bonds. These bonds are then listed to the Stock Exchange whereby members of the investing public can sell them to interesting others, thus creating liquidity and a sense of fair prices and valuations for the same.

Profit sharing and capital gain to Investors

Both casual and professional investors in the stock markets, as large as institutional investors or as small as an ordinary middle-class family, gets their share of investment benefits of the company they have invested into through dividends payments and price increases that result in capital gains, and hence gets a share in the wealth of profitable businesses.

Promotes the habit of saving and investment

Stock exchange provides a place for saving of financial resource to general public. Thus, it creates the habit of saving and investment among the public in the sense that people in the society have a place where they have choices to deploy their savings for investment purposes.

The funds placed at the disposal of companies are used for productive purposes within the economy.

Mr Marwa is chief executive officer of the Dar es Salaam Stock Exchange Email: moremi@dse.co.tz

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