THE STOCK EXCHANGE

A stock exchange is a highly organized market where securities are bought and sold. The members of the stock exchange trade in securities on behalf of the investing general public. The term securities is used to mean shares, stocks, bonds, debentures and all other investment possibilities offered through the stock exchange. The phrase highly organized market means that it is a kind of market where only registered members (people with the required qualifications, knowledge and skills in the commodity being traded) are allowed to trade from its floors. When a company offers its shares for sale the public through the exchange, its really raising capital. This means that money raised through the sale of shares is never refunded to the people that bought the shares. Shares are bought by the public either through primary market trading or secondary market trading. PRIMARY MARKET TRADING This is when shares are offered for sell for the very first time by a public limited company to the general public. Normally, the main players on the stock exchange e.g. investment brokers such as banks buy the shares for a lump sum amount before letting the shares be floated on the stock exchange. SECONDARY MARKET TRADING This is when the shares which were bought through primary market trading are offered for sale or purchase at an exchange. All second hand or subsequent deals in shares at the exchange are dealing in what is referred to as secondary market. FUNCTIONS OF THE STOCK EXCHANGE The stock exchange performs the following functions; 1. Provides a market where shares and other securities can be traded. 2. Enables companies to raise the much needed capital by offering shares at the exchanging. 3. Ensures that registered members represent the interests of the exchange to the public as transparently and honestly as possible. 4. Compensates members of the public who have been defrauded by dishonest dealers/members of the exchange. 5. Ensures that listed companies or companies wishing to be listed by the exchange meet the listing standards. 6. Enable institutions and the public to invest in profitable investments. 7. Enables companies and government to raise loans. 8. To advertise shares offered for the first time on behalf of the listed company. 9. The public the prices of shares and other securities. 10. To regulate and supervise the activities of the registered members. IMPORTANCE OF THE STOCK EXCHANGE The stock exchange is a very vital institution in any national economy. It is really a centre through which peoples savings are channeled to productive economic activities. This in turn helps to develop the country, build the economy and create more job opportunities for the people. Shares, bonds, debentures and other securities are a means by which people can participate in the nations economic growth. Besides this, the stock exchange provides the legal body by which shares and other securities can freely and safely be traded. Without it, there would not be any practical ways of addressing fraud or other acts of misrepresentation when trading securities. Members of the public would have no where to turn to when they fall victim to dishonest dealers of securities.

SECURITIES TRADED AT THE STOCK EXCHANGE There are many types of securities which are bought and sold through the stock exchange. They include the following: 1. SHARES A share is a unit of a limited companys capital. Shares are sometimes referred to as Equities because they represent equal parts of the capital, and because they are allocated equal dividends when sharing profits. A person who buys a share in a limited company automatically becomes a part owner of that business permanently. No refunds can be obtained from the company once a share has been sold. However, a shareholder can resale his shares to another person through the stock exchange. Shares are divided into three main types being; i Preference shares Preference shares are those which are given at a fixed rate of dividend and normally paid dividends first before other shares are paid. They however, do not have voting rights at A.G.Ms. ii Ordinary shares These are the most common type of shares. They normally account for the largest part of the share capital of any limited company. They are the shares that carry voting rights at the A.G.M meaning that most policy decisions are decided by the holders of ordinary shares. Ordinary shareholders are however, paid last when it concerns sharing dividends. Their dividend is not calculated on fixed rates. They may have to sacrifice dividends in years of poor trading where little profit is made. iii Founder shares Founder shares are really ordinary shares but are differentiated by one unique feature; they are reserved only for the original founders of the company. For this reason, they are given certain rights that cannot be given to other types. They are normally few in number. They also carry voting rights in policy decision making. 2. STOCKS A stock is a number of shares, usually 100 shares that are consolidated into one block for easy handling. In Zambian context, stock is made up of shares that have been fully paid for and converted to stock under section 50 of the Companies Act. 3. GOVERNMENT BONDS Bonds are often sold by government when they want to raise money to finance a government project. What this means is that when you buy a government bond, you have in fact lent money to the government. Government bonds represent a very safe form of investment because they are backed by government resources. They are issued for a fixed period of time and receive a fixed rate of interest. Most countries restrict the sale of government bonds to citizens only. Government bonds fall in two categories namely; Local government bonds, which are issued by the city or municipal councils and Central government bonds which are by the state. 4. DEBENTURES Debentures are loans given to a limited company by the investing public. Debentures are actually sold at the stock exchange as securities. Whenever a person buys a debenture, they actually lend money to the company whose debenture they bought. Debentures are also safe forms of investment so long as the company remains profitable because they always receive the first share of the profits of the company at the

end of every trading period. They are issued for a fixed rate of interest and their periods may vary depending on the type of debenture in question. A debenture is either a Naked debenture, for which there is no collateral secured against its acquisition by the company or Mortgage debenture which always secures some collateral when issued. It is important to note that securities traded on the stock exchange are in two main categories namely; Equity securities commonly referred to as shares, and Debt securities which are loans such as government bonds and debentures. MEMBERS OF THE STOCK EXCHANGE A stock exchange is a highly organized market. For this reason, no outsiders are allowed on its floors. Outsiders can only buy or sell their securities through the registered members of the stock exchange. The registered members of the exchange include the following: 1. BROKERS Brokers are agents who buy or sell securities on the exchange for their principal. The principal in this case can be any member of the investing public. Agents work for a commission. For brokers, this commission is called brokerage. Stockbrokers are normally found in brokerage firms such as banks and other financial institutions. 2. JOBBERS These are the actual dealers on the exchange floors who buy and sell share and other securities for themselves. 3. SPECULATORS These are dealers in securities who trade by anticipating a rise or fall in share prices in the near future. They stock up or sell off their current stock hoping that the sharp rise or drop in price in future will make them a quick profit when they sell off or reclaim the same shares. There are three types of speculators and these are called: i Bulls Bulls are traders who buy shares now with the expectation that their prices will rise in a week or so later and then they would sell them away for a profit.

ii Bears Like bulls, bears expect a change in price for their shares in the near future. However, bears expect a drop in share prices. So they sell off all their current shares hoping to buy them back when the price drops. Doing so would earn them a quick profit. iii Stags These are traders who specialize by dealing only in new shares. They buy huge quantities of newly quoted shares. They do so with the hope that these shares would soon fetch a high price and then they would sell them off for profit. It must be noted however, that share speculation is like gambling, you either win or lose. The price may remain constant for longer than anticipated or worse still, it may shift upward or downward opposite to the expectation of the speculator.

THE LUSAKA STOCK EXCHANGE The Lusaka Stock Exchange (LuSE) is the securities exchange market we have in Zambia. It was established by way of an Act of parliament and was opened on 21st February 1994 as non profit making public limited company. Reasons for establishment of LuSE 1. To promote and encourage private sector enterprise and initiative. 2. To attract local and foreign investment. 3. To facilitate the privatization of state owned enterprises. 4. To facilitate wealth creation for the Zambian citizens. 5. To develop and establish a securities exchange/ market in Zambia. 6. To remove all exchange controls and to enable the free movement of funds into and out of the country. Functions of LuSE 1. To provide a source of cheaper, long term capital for existing and new companies in Zambia. 2. To enable Zambians to participate the growth of the countrys economy by investing in companies and other areas of growth. 3. To attract foreign investors to invest in the local companies or even create new ones. 4. To facilitate the privatization of state owned enterprises as part of the economic reforms to liberalize the Zambian economy, promote private sector initiative and create a free market system. 5. To promote wealth creation through the wide ownership of shares. 6. To provide an efficient, fair, orderly and transparent market for secondary trading in shares and other marketable securities.

Main players on the Lusaka Stock Exchange 1. BROKERS/DEALERS These are professionals who are trained to help the general public in buying and selling securities on the stock exchange. They are licensed and authorized by the Securities Exchange Commission as members of the Lusaka Stock Exchange to trade in shares and other securities. The meaning of broker/dealer is that these professionals operate in dual capacity as agents for the investing public and as dealers in shares and other securities. When they operate as agents, they perform the following functions; They buy and sell shares for the public They Endeavour to buy or sell shares for the best shown price on the exchange for their principal. This is referred to as the best execution rule. They advise their clients on the best investing possibilities. They prepare all documentation required for the smooth completion of deals in buying or selling shares. The most common document is the contract note which shows the full details of the share transfer deal, the remuneration charges for the agent and all related expenses during the transaction. They take care of all routines followed during such transactions.

Brokers/dealers also deal on their own behalf. This being the case, that they are allowed to deal in shares and securities for the public and for themselves, when a contract note is sent to the investor it must show the capacity in which the broker/dealer bought or sold the shares i.e. whether he bought the shares as an agent or as a principal. 2. LISTED COMPANIES A listed company is one that has been registered by the Stock Exchange Commission for public trading on the stock exchange. Once listed, the company is included on the Top Tier sometimes called the Listed Tier of the stock exchange. This is basically a list of the companies that have been listed by the exchange after meeting the following requirements: Proof that the company is a financially sound and viable business entity. Proof that the directors have the necessary knowledge and skills to maintain the company and that they can be trusted with public funds. That they can meet all listing procedures and requirements. That their listing has been approved by the LuSE listing committee and the full LuSE board. As at 30th June, 2007 sixteen companies were appearing on Top Tier of the LuSE. 3. PRIVATE INVESTORS These are ordinary citizens belonging to the public that wishes to invest their savings in shares and other securities on the exchange. 4. INSTITUTIONAL INVESTORS These are companies or other institutions that invest their excess incomes in shares of other companies. Indeed, a company can buy another company or buy shares in it. 5. UNDERWRITERS These are investors who buy a certain number of issued or listed shares of a new company if the public does not buy these shares. Underwriting ensures that a company will definitely sell some shares no matter how hard market conditions may be. This gives some financial relief to the company in need of the share capital. 6. THE GOVERNMENT The government seeks and obtains additional funding on the stock exchange by selling bonds to obtain loan capital from the public. The money so raised is used to erect public utilities which are vital for better living. 7. FOREIGN INVESTORS These are investors coming from outside our country. They are normally attracted to come and invest on the major economic growth sectors of our economy such as tourism, mining, agriculture, etc.