Dada Adefolami

By Dada Adefolami

A stock exchange allows consumers to participate directly in the market of a country. A stock exchange allows companies to have some besides traditional banks for obtaining the money that the need.

The main function of a stock exchange is to facilitate the transactions associated with both buying and selling of securities. Buyers and sellers of shares and stocks can track the price changes of securities from the stock markets (derivatives, equity etc.) in which they operate.

The stock market is a symbol of the nation’s economy and strength. A country whose stock market is sound and going up is considered to be in great economic status. Since the stock market comprises of the shares of the largest and most successful companies in the country its considered the indicator for the nation’s economy and industrial production.

Stock market listing is a way of raising long-term equity finance for company by offering shares to potential investors.

Listing on a stock market is unlikely to be suitable for smaller businesses, as the process involved can be time-consuming and costly. Moreover, investors are only interested in buying shares in companies that have secure earnings streams and strong growth prospects. They will also expect a higher return from an investment in a smaller business, which is considered more risky than one made in a large, established company.

There are three stock markets in the UK: the London Stock Exchange, where larger companies are listed; and the Alternative Investment Market(AIM) and PLUS, which are designed for smaller, growing companies, Nigeria we have Nigeria Stock Exchange

The secondary function of the stock market is that the market plays the role of a common platform for the buyers and sellers of these stocks that are listed at the stock market. It is the secondary market of the stock exchange where retail investors and institutional investors buy and sell the stocks.

Purpose
The primary purpose of a stock market is to regulate the exchange of stocks, as well as other financial assets. Such regulation ensures a fair environment for not only investors, but also the corporations whose stocks are traded in the market.

A stock market listing is normally used to raise capital for a business’s consolidation and growth objectives, such as new production facilities, expanding in overseas markets or paying back a venture capital investor.

Listing is also a way of attracting private investors into a business and for facilitating an owner-manager to cash in on their investment. This type of investor includes business angels, Enterprise Investment Scheme investors and Venture Capital Trust Investors, who generally like an exit strategy in place.

All of the above are true about stock market. Investors always make money from investing in the stock market. All stock markets feature physical location-based auctions of stocks. [ Even non-investors are influenced by the stock market

Also, a company may list to gain a higher public profile.

Costs
The flotation process has demanding legal, regulatory, financial and marketing aspects. Specialized professional advisers are needed to assist with the flotation process and their fees represent the bulk of the direct costs of a listing which, depending on the size of the flotation, may reach a six-figure sum.

These include the following the following:
1. Corporate adviser
2. Stockbroker
3. Corporate lawyer
4. accountant
5. public relations firm (for large listings).

The corporate adviser guides a company through the flotation process, starting by assessing whether the company is suitable for listing and then undertaking a range of duties to coordinate entry into the market, such as submitting the application to join the stock market on behalf of the company, assisting in drawing up the prospectus and making sure that all the information contained in it is correct and complete.
Additionally, a corporate adviser will provide support on a range of issues, such as method of flotation, timetable, pricing of the shares and marketing strategy.  

Corporate advisers can be appointed from those approved and registered by a relevant authority or stock market; for example, companies choosing the AIM require a nominated adviser registered with the London Stock Exchange, while those choosing the PLUS market require an adviser who is a member of PLUS.

The stockbroker acts as the main interface between the company and the stock market and will assess the demand for the company’s shares and the overall market conditions. They will also actively market the shares to potential investors. Therefore, a broker with experience of the company’s industry would be more effective in creating investor interest before and after listing.

The corporate lawyer is responsible for conducting due diligence in the company and for verifying the investment prospectus and the supporting documentation.

The reporting CFO will review the company’s financial records, which may be used by potential investors to make their investment decisions.

The financial public relations firm or investor relations firm will help raise the company’s profile to a larger number of investors.

The fees charged by the various advisers will vary according to the specific tasks agreed, the size and complexity of the listing and any appropriate fees negotiation taking place.

Further direct costs of listing are the admission and annual fees payable to the stock market to which the company is seeking admission. The admission fee is based on the market capitalization of the company on the day of admission, while the annual fee is fixed for all companies. In all every stock market have their minimum fee for the current annual fee

Apart from the cost of listing, there is also the burden of ongoing compliance. This is due to rules imposed by the listing governance, additional reporting requirements, corporate governance and any annual fees due.

An indirect cost of a stock market listing is the rate of return required by potential investors. For investments with a higher risk profile, such as those in smaller, newly listed companies, potential investors require a higher rate of return than for businesses already established in the stock market. A company needs to assess whether it is able to deliver this rate of return through future strong growth in earnings and possibly a suitable dividends policy.

Time frame
A stock market listing is a compound process, which sometimes needs to be preceded by a pre-float preparation. This typically takes at least three months to complete but could actually stretch to one year.

It can actually take a business many years to prepare for listing. The right management structure needs to be in place to help attract investors prior to listing.

The time frame of the flotation process depends on any practical issues that the company and its advisers need to resolve, such as the correct pricing of the offering, completion of due diligence, production of key documents including the prospectus, and any considerations relating to the state of the stock market at the time of a proposed listing.

The stock market is a large financial entity that serves many purposes. It allows the public to engage in corporate activity which can suit both investors and companies alike. The economy of a nation further benefits from stock market activity

The Advantages
1. Access to additional equity capital to consolidate or develop business
2. Facilitating owner managers and other investors in the realisation of their investment by access to trading in a liquid market
3. Higher public profile for the company
4. Providing incentives to employees by granting share options
5. Providing added reassurance to customers and suppliers
6. Improving the ability to acquire other businesses by issuing shares as well as cash.

Disadvantages
1. High cost of listing and subsequent higher costs of compliance with specific regulation
2. Uncertain timing of listing
3. Burden of additional regulatory requirements and compliance with strict standards of corporate governance
4. Loss of control over the company, which may eventually be taken over
5. Possible loss of management focus following listing, due to dealing with investors
6. Shift of focus from owner-manager objectives to interests of other shareholders
7. Possible demotivation of employees who are not offered shares.

Finally
The right finance for your business section gives examples of financial structures that are suitable for different trading types and sizes of businesses.
If a business, such as a smaller entity, is not suitable for stock market listing but requires equity finance to fund its growth, business angels or venture capitalists may be suitable alternatives.

If the objective of a listing is to allow the owners to cash in on their investment, a trade sale, where the business is sold to another outside party, might be a viable solution.

The primary purpose of a stock market is to regulate the exchange of stocks, as well as other financial assets. Such regulation ensures a fair environment for not only investors, but also the corporations whose stocks are traded in the market.

Typical marketing function types within a larger business might include performing market research, producing a marketing plan, and product development, as well as strategically overseeing advertising, promotion, distribution for sale, customer service and public relations.

Importance of stock exchange

Stock exchanges perform important roles in national economies. Most importantly, they encourage investment by providing places for buyers and sellers to trade securities. This investment, in turn, enables corporations to obtain funds to expand their businesses

• Dada Suraju Adefolami, Professor of Finance, School of Business Administration, UNEM University, Costa Rica, is a Finance / management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]: 08052043855