Build your knowledge of investing in shares
In the last week’s piece, whose intent was to educate ourselves about how old and evolutionary the concept/idea of stock markets has been and how impactful it can be; basing our analogue from the history of human kind, especially in the past 300 years. We noted that as one of the financial markets platforms, stock markets facilitate growth of economic enterprises, the democratising of wealth, facilitating preservation and distribution of wealth in the forms of ownership, facilitating wealth management, facilitating business and financial risk management, etc.
Thus, the concept of stock market and what it is capable of to private individuals, to companies, institutions, ideologies, values, economies is as big and old as history tells us. Admittedly, for us, we have generally not given this idea/concept the necessary focus and attention that it requires. Because of our slow pace in embracing it, most of our economic institutions are not as robust and not inclusive. For instance, our GDP growth of 7 percent each year for the past twenty years does not correlated with poverty reduction — economists would say this better, but for me and for the purpose of this article — lack of inclusive ownership in companies and key factors of production that contribute largely into the GDP growth can be one of the factors. There are many lost opportunities related the ability to learn to unleash the power of collective ownership through shares ownership and tradability. As a result, we have an economically weak exchange without adequate supply of securities and investors who could otherwise leverage on the existence of the exchange, resulting in capital deficit and weak economic institutions and cycle of poverty.
So, what are the opportunities for us and what is the role of the stock exchange (and instruments traded into it) in any society that embraces the market economy model?
Promotes capital formation: The stock exchange provides companies with the facility to raise capital for growth and expansion through selling shares to the investing public. Besides the borrowing capacity provided to an individual or firm by the banking system, in the form of credit, stock exchange is the other common form of capital raising used by companies and entrepreneurs. Thus, the stock exchange plays an important role in capital formation in the country.
Mobilises savings for investment: When people draw their savings and invest in shares (through an IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources, because funds which could have been consumed, or kept idle in the form of savings are mobilized and redirected to help companies finance their operations. This promotes businesses with benefits to other economic sectors, resulting in stronger economic growth and higher productivity levels of firms.
Facilitates companies growth: Companies view mergers or acquisitions as opportunity to expand product lines, increase distribution channels, hedge against price volatility, increase market share, or acquire other business assets. 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 mode of growth, even in organic growth, companies use the Exchange to raise capital through IPOs and listing of the same.
Increases government funds for development projects: The government can undertake projects of national importance and social value by raising funds through sale of its securities via stock exchange. At various stages 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, health facilities, education facilities, etc by selling bonds. These bonds can be raised through the Stock Exchange whereby members of the public buy them, thus lending money to the government.
Profit sharing and capital gain to investors: Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle-class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses and use stocks to preserve values of their assets..
Promotes the habit of saving and investment opportunity for small servers: Stock exchange provides a place for saving to general public. Thus it creates the habit of saving and investment among the public. The funds placed at the disposal of companies are used for productive purposes. Investing in shares is open to both large and small investors because investors buys the number of shares they can afford. Therefore the stock exchange provides the opportunity for small investors to own shares of the same companies as large investors owns.
Corporate governance and safeguarding activities for investors: The stock exchange renders safeguarding activities for investors, which enable them to make a fair judgment of their securities. Directors of listed companies are required to disclose all material facts to their respective shareholders, thus innocent investors may be safeguard from “clever advisors”.
By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders, and the rules for public companies imposed by the stock exchange and the capital markets regulator. Consequently, public companies tend to have better management records.
