STOCK MARKET ASSIGNMENT

Stock Market Assignment

Stock Market Assignment

Recent decades have seen an extraordinary surge in the level of share ownership in Australia. According to the Australian Stock Exchange, Australia has more shareholders per head of population than any other country-with over half the adult population now holding shares (Barrera, 2007). This has made the operation of the share market an increasingly important aspect of the every day lives of many Australians, and a more important part of the market economy (Epstein, 2005).

The share market has two key roles in Australia's financial system. Its first role is to allow companies to raise funds by selling new shares to investors. A share, also known as an equity security, is a financial asset that gives its holder part-ownership of a company (Barrera, 2007). The share market's second role is to allow a company's existing owners, known as share holders, to sell their shares to those who wish to buy a stake in the company (Flanagan, 2006).

For a firm to issue shares, it must be a company- ie. it must be 'incorporated' (Basu, 2003). An incorporated business is one that is recognised as a separate legal entity from those individuals who own or manage the business.

The share market deals only with the trade in shares of public companies (one whose shares are not subject to any transfer restrictions). Like product markets, the share market brings together a buyer and a seller in a medium of exchange. Most share transactions take place through a market facilitator known as a stock exchange. In many ways, the stock exchange is simply the physical manifestation of the market; buyers and sellers coming together in the one place and at the one time for trade in a range of securities such as shares, company options, bonds and trusts (Basu, 2003). It is important to note that the share market does not have just one physical location. Shares are mostly traded through computer networks and over the Internet, increasing the speed, efficiency and accessibility of the market.

The largest share market in Australia is the Australian Stock Exchange (ASX). The ASX was formed in 1987 when the six largest individual exchanges spread around Australia were combined. The ASX provides a regulated environment for investors to buy and sell shares(Boyce, 2002).

Broadly speaking, the role of the share market can be considered from three main perspectives: shareholders, companies and the economy as a whole (Flanagan, 2006).

The main reasons for investors to purchase shares are to gain a stake in any company profits and to make capital gains from increases in share prices. As owners of the company, shareholders are entitled to share in the successes of the company. If the company returns a profit, a proportion of these profits will be returned to shareholders. These payments are known as dividends, and are awarded on a per share basis. In addition, as the company grows, the value of the company increases and its share price will also increase. When this occurs, shareholders may decide to sell ...