Functions of the Stock Exchange Market
- To promote the savings and for them to be canalized towards of carrying through investment projects that otherwise wouldn’t be possible you need that the issuing institution of the securities to be admitted for quoting. The negotiations will be done on the primary market.
- To provide liquidity to the investors. The investor can recuperate the money invested when needed. For it, he has to go to the stock exchange market to sell the securities previously acquired. This function of the stock market is done on the secondary market.
Other functions of the stock exchange market as an organization are:
- To guarantee the legal and economic security of the agreed contracts.
- To provide official information about the quantities that are negotiated and of the quoted prices.
- To fix the prices of the securities according to the fundamental law of the offer and the demand.
Specifying a bit more and centering on the two main agents that intervene in the market, investors and companies, we could do the following classification:
Functions done by the stock exchange market in favor of the investor:
- It permits him the access to the profitable activities of the big companies.
- It offers liquidity to the security investments, through a place in which to sell or buy securities.
- It permits for the investor to have a political power in the companies in which he invests its savings due that the acquisition of ordinary shares gives him the right (among other things) to vote in the general shareholders meetings of the company in question.
- It offers the possibility of diversifying your portfolio by enlarging the field of strategy of investments due to alternative options, as could be the derived market, the money market, etc.
With respect to the function done by the stock exchange market in favor of the companies:
- It supplies them with the obtaining of long-term funds that permits the company to make profitable activities or to do determine projects that otherwise wouldn’t be possible to develop for lack of financing. Also, this funding signifies a less cost than if obtained at other channels.
- The securities quoted at the stock exchange market usually have more fiscal purpose advantages for the companies.
- It offers to the company’s free publicity, which in other way would suppose considerable expenses. The institution is objecting of attention of the media (television, radio, etc.) in case any important change in its owners (the share holders).
There also exists a constant following (newspapers) of the quotations.
Therefore we can see how the stock exchange market supposes a great advantage to the companies, but there are also some inconveniences to have in mind:
- First of all, they need of a series of conditions to be apt to enter to the quotations, not all the companies that apply can do it.
- The issuing of shares may suppose a loss of power for the founders of the company. Anyway, this is very relative because it will depend on the grade of atomization on the participations of the new shareholders and of the percentage of shares that the founders keep over the total capital of the company.
- If for example a 49% of the share capital is in hands of the founders, these could loose the control of in case the other 51% would be in hands of one main shareholder. However, this rarely happens, due that the share capital that usually goes to the stock market tends to be distributed between a great number of shareholders that acquire modest participations in respect to that of the capital of the company the founders may still keep control with share capital is distributed between a great number of participants.
- Now then, the property of these shares implies the possession of certain rights over the company in which you participate.
These are: political rights, among which appears the possibility of participating in the general share holders meetings and in the administration of the company by means of the execution of your rights to vote; and the economic right, which embraces the possibility of receiving dividends, preferential rights of subscription, the transmission of shares (selling) and the right to the liquidity value.
This last implies that at the moment in which the company is liquidated, what remains is proportionally divided between the shareholders.
The possession of all these rights is what reduces the power of the founders.
- The shares may pass to be property of unknown people to the founders. At the moment in which they are object of quotations at the stock exchange market any supplier of capital may have them. If it’s a company that previously knew all its shareholders, considering this as an asset of value to the company. The stock market quotation may generate an important change that will not always be positive.
- The companies that are quoted at the stock market offer a better transparency, in a way that the general public may have access to any information related to their evolution and activities.
- This makes them have a greater control and to supervise every movement done.