The Share Market and The Corporation: Websites: WWW - Asic.gov - Au

Chapter 4
The Share Market

and the Corporation
Websites:
www.asic.gov.au
www.asx.com.au
www.nyse.com
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Learning Objectives
• Understand the nature of corporations and
their use of equity as a financing tool
• Describe the role of the stock market
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Chapter Organisation
4.1 Introduction
4.2 The Nature of the Corporation
4.3 The Stock Exchange
4.4 The Development of Share Markets
4.5 Summary
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4.1 Introduction
• Share market
– A formal exchange facilitating the issue, buying
and selling of equity securities
• Publicly listed corporation
– A company whose shares are quoted and traded
on a formal stock exchange (SX)
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4.1 Introduction (cont.)
• Ordinary share
– The principal form of equity issued by a
corporation which bestows a claim to residual
cash flows and ownership and voting rights
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4.1 Introduction
4.5 Summary
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4.2 The Nature of the
Corporation
• The corporation differs from other business
forms
– Ownership claims are widespread and easily
transferable
– Owners (shareholders) do not affect the day-to-
day affairs of the company
– Shareholder’s liability is limited to the uncalled
amount of the shares
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Corporation (cont.)
• Advantages of the corporate form
– Can obtain large amounts of finance for a
relatively cheap cost
– The liquidity of securities facilitates investor
diversification and encourages investment in
corporate securities
– Specialised management can be chosen (due to
separation of ownership and control)
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Corporation (cont.)
• Advantages of the corporate form (cont.)
– ‘Perpetual succession’—the corporate form is
unaffected by changes in management or
ownership
– The corporate form is suited to large-scale
operations
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Corporation (cont.)
• Disadvantages of the corporate form
– The primary disadvantage arises due to the
separation of ownership and control
 Conflict of interest between owners (shareholders)
and mangers (agents) known as agency theory
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Corporation (cont.)
• Disadvantages (cont.)
– Management may not have strong incentive to
act in the interests of the owners (shareholders)
i.e. maximise shareholder value (share price)
 Moderating influences include
• Investors’ ability to sell shares in a corporation
• Dismissal from the board at AGM by shareholders
• Threat of takeover and loss of employment
• Use of performance incentives like share options
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4.1 Introduction
4.5 Summary
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4.3 The Stock Exchange (SX)
• Primary role
• Secondary role
• Derivative market role
• Interest rate role
• Trading and settlement role
• Information role
• Regulatory role
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Primary role
• The SX facilitates the efficient and orderly
sale of new financial securities
– New floats/initial public offerings (IPOs)
 Initial listing of a corporation on the SX
– Rights issue
 Issue of additional shares to existing shareholders on
a pro-rata basis
– Placements
 Issue of new shares to selected institutional investors
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Primary role (cont.)
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Secondary role
• The SX facilitates trading in existing shares
– No new funds are raised by the issuing company
– An active, liquid, well organised secondary
market increases the appeal of buying new
shares in the primary market
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Secondary role (cont.)
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Derivative market role
• The SX provides a market for trading
equity-related derivative products
– A derivative is a financial security that derives
its price from an underlying commodity (gold) or
financial instrument (Fosters shares)
– Derivative products can be
 Exchange-traded (standardised)
 Over-the-counter contracts (unstandardised)
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Derivative market role (cont.)
• The SX provides a market for trading
equity-related derivative products (cont.)
– Derivatives serve as a
 Risk management tool (hedge)
 Speculative instrument
– Derivatives traded on the ASX include
 Options
 Warrants
 Futures contracts
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Interest rate role
• The listing, quotation and trading of debt
securities on the SX, e.g.
– corporate bonds, floating rate notes (FRNs),
convertible notes, preference shares
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Interest rate role (cont.)
• This role adds value to to a debt issue due
to
– Transparency
– Ease of entry
– Liquidity
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Trading and settlement role
• Shares are traded using an electronic
(computer-based) trading system—Stock
Exchange Automated Trading System
(SEATS)
– Clients’ orders are executed via computer from
the broker’s office
– Orders are executed in order of time received
and the buy/sell price
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(cont.)
• Shares are traded using an electronic
(computer-based) trading system—Stock
Exchange Automated Trading System
(SEATS) (cont.)
– SEATS has improved the speed and efficiency of
trade-processing and settlement, and the
dissemination of information to market
participants
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(cont.)
• ASX CHESS (Clearing House Electronic Sub-
register System)
– Share ownership and settlement performed
electronically
– Settlement of transactions within three days
(T + 3)
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(cont.)
• CDI (CHESS Depositary Interest)
– Electronic depositary receipts issued by the ASX
representing uncertificated (scriptless) securities
 CUFS (CHESS Unit Foreign Securities) for equity
securities
 DI (Depositary Interest) for debt securities
– Overcomes problems of countries not
recognising uncertificated holdings or the
electronic transfer of legal title
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Information role
• Investor confidence in the Australian Stock
Exchange (ASX) relies on informational
efficiency
– i.e. the current share prices should reflect all
information available in the market
• The ASX has a critical role in facilitating the
flow of information to the market
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Information role (cont.)
• Listing rules are SX rules with which a listed
entity must comply
• Examples of information disclosures
required by ASX listing rules
– A change in forecasted profitability
– Appointment of a liquidator
– Declaration of a dividend
– Notice of a takeover bid
– Disclosure of directors’ interests
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Regulatory role
• The aim of regulation is to ensure market
participants have confidence in the integrity
of market operations
• Two main supervisors in Australia
– Australian Stock Exchange (ASX)
– Australian Securities and Investment
Commission (ASIC)
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Regulatory role (cont.)
• ASX
– Ensures listed companies meet specified limited
levels of performance and standards of
information disclosure so investors can make
informed decisions
 Continuous disclosure
– Prescribes appropriate behaviour of broker
participants on the exchange
 Penalties include discipline, penalties, loss of licence
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• ASX (cont.)
– Electronic surveillance systems to monitor
trading behaviour of market participants
 Detect trades that fall outside certain limits
 Cross-references all trades against information on the
relevant company, directors and associated parties
– The National Guarantee Fund (NFG)
compensates investors in the event of
misconduct by a stockbroker
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• ASIC
– Responsible for the supervision of corporations
law and markets
– Established in 1991 as the ASC (Australian
Securities Commission)
– Following ‘Wallis Inquiry’ findings, changed its
name to ASIC
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• ASIC (cont.)
– Responsible for market integrity and consumer
protection across the financial system
– Not solely confined to equity (also investments,
insurance and superannuation products)
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4.1 Introduction
4.5 Summary
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4.4 The Development of Share
Markets
• Origins of the modern share market can be
traced back to commercial activity in
England in the 16th century and the
corporate form of business
• In Australia, share markets developed with
growth in economic activity in cities and
provincial locations and operated quite
independently
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Markets (cont.)
• In 1937 the Australian Associated Stock
Exchanges (AASE) was incorporated which
eventually represented all six capital city
SXs
• In 1976 a joint exchange was formed
between the Sydney and Melbourne
exchanges which allowed members access
to both trading floors
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Markets (cont.)
• 1987 saw the establishment of the
Australian Stock Exchange (ASX) as a
mutual organisation and a single national
market
• In 1998 the ASX was demutualised and
became a publicly listed corporation
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4.1 Introduction
4.5 Summary
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4.5 Summary
• The corporate form of organisation has a number of
advantages (fund raising and management) and the
disadvantage of the separation of ownership and
control
• The SX has a number of market roles
– Primary and secondary
– Derivative
– Interest rate
– Trading and settlement
– Information
– Regulatory
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4.5 Summary (cont.)
• The Australian share market is regulated by the ASX
and ASIC
• The ASX has demutualised and is now a publicly listed
corporation
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Chapter 4

The Share Market

• Describe the role of the stock market

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