THE STOCK EXCHANGE

1. INTRODUCTION TO THE STOCK EXCHANGE

 A Stock Exchange (S.E) is a highly organized market where shares and other securities such as
stocks are sold and bought. A good example of such a market in Zambia is the Lusaka Stock
Exchange (LUSE), which was officially opened on 21st February 1994.
 It is the main centre where first and second hand shares are found.
First hand shares: A unit of capital issued for the first time by limited companies.
Second Hand Shares: These are first hand shares sold to some one else.
 Its main purpose of existence is to facilitate secondary trading of shares by:
- buying and selling shares at a profit.
- allowing investors to buy shares when prices are low
- and selling them when prices go up.
- enabling people/companies to sell shares when prices are high
- and buy them back when low.
- permitting the buying of shares in newly formed companies at norminal value
- reselling them when price pick up.
 The LUSE is regulated and supervised by the Security and Exchange Commission (SEC) of
Zambia which was established by an act of parliament in 1993.
Duties Of The SEC
- Licensing of any person or security market as members of the Lusaka stock Exchange.
- Registering all shares of a public company.
- Authorizing collective investment schemes.
- Creating investor confidence by establishing a compensation fund to reward persons who
suffer losses due to fraudulent dealers.

2. FUNTIONS/PURPOSES OF ESTABLISHING THE LUSAKA STOCK EXCHANGE (LUSE)

 To facilitate the raising of capital by companies through the floating of shares.
 To promote private sector enterprise and initiative and create a free market system.
 It facilitates the secondary trading of shares and other securities, because no one would buy
shares in a company unless it was possible to sell such shares to some one else when need arises.
 To publish prices at which shares are bought and sold at the Stock Exchange.
 To help in the process of privatization of parastatal companies, as part of the economic reforms to
liberalize the Zambian economy.
 To promote wealth creation for Zambians through wide ownership of shares.
 The Stock Exchange instills confidence in the general public, as allows for the free movement of
funds in and out side the country.
 To provide a source of cheaper and long term capital both new and old companies.
 To promote investor confidence by encouraging the international community to invest in Zambia,
thereby increasing the amount of capital needed for business.

3. MEMBERS OF THE STOCK EXCHANGE

(a) Stock brokers and Jobbers: These constituted the old system in which stock brokers
acted as agents buying and selling the shares on behalf of the general public. Jobbers were
the actual dealers in shares and stocks on the Stock Exchange, buying and selling shares for
themselves.
(b) Brokers as Agents and Dealers: These constitute the modern system. The Lusaka Stock
Exchange does not have any jobbers.
- Brokers are professionals who are trained to help the general public in buying and selling
shares on the stock exchange.
- They are licensed and authorized by the SEC as members of the Stock Exchange.
- Apart from being agents, brokers also act as dealers.

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 (i) Brokers As Agents
- Buys and sells on behalf of the members of the public at the best price (best
execution rule) shown on the Stock Exchange.
- Provides advise on the particular shares to buy.
- Prepares a contact note, a document that concludes the deal in the buying and
selling of shares at the Stock Exchange.
(ii) Brokers As Dealers
- Buys and sells shares for himself as a principal with a view to make profit.
- Does not deal with members of the public, but stock brokers.
(c) Listed Companies:
- These are companies registered or admitted to the official list of the LUSE.
- They are controlled by the Securities and Exchange Commission (SEC), whose shares
are available to the general public through the LUSE.
- Shares of Listed Companies are freely transferable.
- Listed Companies are not allowed to segregate, but rather treat all shareholders equally
- thereby displaying good corporate governance and transparency.
Advantages To Shareholders In Listed Companies
- Listing improves the liquidity of shareholders, as they are able to receive dividends or
even buy further shares if the company decides to issue them.
- Improves and enhances the image of the company through the facilitation of increased
demand and share price.
- Shareholders benefit from the bonus declared by the listed companies.
- They have the privilege of attending and voting at Annual General Meetings (AGMs)
- They have access to information such as that of reports and accounts.
- Shareholders benefit from tax exemptions that may be provided.
Disadvantages To Shareholders In Listed Companies
- Losses arising from a drop in share prices.
- This forces shareholders to seek professional advice from brokers at an additional cost.
(d) Private and Institutional Investors
- Private investors are individuals with cash which they can save or invest by buying
shares of selected companies on the Stock Exchange.
- Institutional investors are companies or indeed institutions that invest money in the
shares of other companies.
(e) Underwriters
- These are investors who agree to buy a certain number of shares listed at the Stock
Exchange, if the public does not buy them.
(f) The Government
- Sells stocks or bonds on the Stock Exchange in order to raise loan capital for the
building and renovations of the infrastructures such as schools, hospitals,
roads,etc.

FACTORS INFLUENCING SHARE PRICES

 The supply and demand of such shares.
 The profit record of the company and rate of dividend paid to share holders.
 Changes in government policies
 Political interference in foreign countries effects shares of companies with a large export
market.
 Changes in the rate of interest on government securities. For example, a rise in the market
rate of interest compels some investors to buy government securities instead of company
shares.

Munali Boys High School - Lusaka Page 2 G. Mumba (Mr.)

 REVISION QUESTION: (From last year’s (2006) Past Exam Paper, Q4)
(a) For what purposes was the Stock Exchange established? Give 4 purposes. [4]
(b) How does the Lusaka Stock Exchange (LUSE) facilitate secondary trading? [6]
(c) What is a listed company on the Stock Exchange? [4]
(d) Give six advantages to a shareholder in a listed company. [6]

ANSWER
(a) Purpose For LUSE being Established
 To facilitate the raising of capital by companies [1]
 through the sale of shares for new companies. [1]
 To facilitate secondary trading of shares [1]
 and other securities. [1]
 To help in the process of privatization of companies. [1]
 To enable broad and wide share ownership [1]
 To help in evaluation and pricing of investments [1]
 To instill investment confidence in the members of the public. [1]
 To provide information to members of the public and investors, such as
the availability and prices of shares on the Stock Exchange. [1]
[Max 4]
(b) How LUSE facilitates Secondary Trading
 This is the buying and selling of shares for a profit [1]
 by allowing investors to buy shares when prices are low [1]
 and sell them when prices go up. [1]
 By enabling people/companies to sell shares when prices are high [1]
 and buy them back when low.
 By permitting the buying of shares in newly formed companies at nominal value [1]
 and them when prices pick up. [1]
[Max 6]

(c) A listed Company on LUSE

 These are companies which are admitted to the official list of LUSE. [1]
 They are controlled by the Securities and Exchange Commission (SEC) [1]
 and LUSE regulations [1]
 whose shares are available to the general public through LUSE. [1]
 Shares in these companies are freely transferable. [1]
 Listed companies must operate in a transparent manner [1]
 and show good corporate governance. [1]
 They must treat all shareholders equally [1]
[Max 4]

(d) Six Advantages To A Shareholder in A Listed Company

 Listing improves the liquidity of shares [1]
 Shareholders benefit from several tax exemptions, i.e no capital gains tax [1]
 Company income tax is reduced [1]
 Currently between 25% and 35% [1]
 There is no property transfer tax [1]
 Shareholder is protected by the Stock Exchange [1]
 Improves and [1]
 enhances the images of the company [1]
[Max 6]

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