Purposes of stocks exchange
Direct Costs of buying and selling of securities
Factors to consider in choosing financial asset
Stock Exchange Securities
Stock Exchange is an aspect of the market that provides a medium through which stocks, bonds and securities are exchanged (Gurusamy, 2009). The main players in the stock exchange are stock brokers and traders. Stock exchange also facilitates the issuance and redemption of financial instruments and securities. In addition, stock exchanges facilitate income and dividend payment by listed companies. Stock exchange is a free market whereby trade of securities is determined by the forces of demand and supply (Gurusamy, 2009).
The Australian Stock Exchange (ASX) is a financial market that facilitates the purchase and sell of debt securities and shares in Australia. ASX was established in 1999 and has continuously played its role as a share market in Australia. There are over 2000 companies that are publicly listed in ASX (Australian Stock Exchange, 2012).
Purposes of stocks exchange
Stock exchange is a major component of stock markets and plays important roles in an economy. The major functions of the stock exchange in an economy include mobilization of investment savings; creation of investment opportunities for small investors; facilitation of capital acquisition by the state government and facilitation of efficient corporate governance by companies. In addition, stock exchange contributes to company growth and facilitates profit sharing. Stock exchange reveals whether the economy is on track or not (Gurusamy, 2009).
According to Gurusamy (2009), government may offer treasury bonds and other securities for public purchase from time to time. The bonds and securities are raised through the stock exchange where the public buy them from the government. This offers a chance for the government to tax its citizen to get additional funding. Through the issuance of financial securities and bonds, the government can raise funds to finance different short term development projects (Gurusamy, 2009).
Stock exchanges are essential in raising capital for capital intensive companies. Stock exchange provides a public market through which these companies go public with a view of raising capital. Gurusamy (2009) opined that stock exchange market facilitates the raising of venture capital for start-up of companies. Established multinational corporations use stocks exchanges to provide capital to small companies whereby corporate partner has to reciprocate by offering equity, marketing rights and patent rights (Gurusamy, 2009).
Stock exchange mobilises investment savings for investors who would have otherwise been forced to invest in non-interest banks. The purchase of the new company shares, rights issue or Initial Public offering (IPOs) investors save their money. Money invested is productively utilised by the company (Gurusamy, 2009). Furthermore, this contributes to economic growth due to increased company productivity. At the same time, the investor is assured of benefits in the form of dividends. Good company performance results to capital gains. Therefore, investors also share in the profitability of the company. Additionally, stock exchanges facilitate the creation of investment opportunities to small investors since they can buy shares that they can only afford. This enables small investors to own shares in the same company just like the other big investors (Gurusamy, 2009).
Finally, stock exchange is a helpful indicator of the general trend of economic growth. It offers statistical information on the general trends in share prices of companies operating in an economy. This information is interpreted by stakeholders to indicate whether there is an economic downturn or financial crisis that may trigger stock market crash (Gurusamy, 2009). For example, dwindling share prices may be an indication of a looming economic recession or financial crisis. On the other hand, if share prices rise or remain relatively stale, this may be an indication of economic growth and increased productivity in the economy.
SP AusNet Company trades ordinary shares in the Austrian Stock Exchange. SP AusNet Company operates in the energy industry in Australia and Singapore. The company has its operations in the energy sector. The ASX code for SP AusNet Company is SPN (SP AusNet, 2012). Australand Property Group whose ASX code is ALZ issues preference shares in the ASX. The company operates in real estates and property industry within Australia. Australand Property Group is involved in the real estate industry (Australand Property Group, 2012). On the other hand, Australian Foundation Investment Company (AFIC), whose ASX code is AFI, issues convertible notes in the stock exchange (Australian Securities Exchange, 2012). Australian Foundation Investment Company is an investment company that specialises in investing in Australian equities (Australian Foundation Investment Company, 2012).
The most commonly traded security in Australian Securities Exchange is ordinary shares. Ordinary shares have five characteristic features that include limited liability, pre-emptive rights, liquidation rights, voting rights, and dividend payments. Ordinary shares have limited liability. This means that, if an organisation becomes bankrupt, the liability of the investors will only be limited to the shares. Secondly, in case a company is liquidated due to bankruptcy, ordinary shares have rights to claim a portion in the returns from the sale of the company (Swart, 2002). They are paid last after all creditors, preference shareholders, and bondholders have been paid. Existing ordinary shareholders have rights to purchase new shares issued by the company at lower prices before they can be publicly listed. Ordinary shares also provide privilege in the voting process of the company. This offers the shareholders control of electing the company board members. Lastly, ordinary shares entitle the shareholders to a share of company profit through dividends payments. Dividend rates are not fixed and are dependent on the company profitability and the board of directors decisions (Swart, 2002).
Preference shares are a form of hybrid or interest rate securities that are different from ordinary shares. Firms issue preference shares to the public with the aim of getting funds. There are only three characteristics of preference shares. Preference shares have fixed rate of dividend payment over a period (Swart, 2002). Those holding preference shares are eligible to bonus reparation at a constant rate. This is regardless of the profitability of the company. Furthermore, preference shares are less risky as compared to the ordinary shares. Nevertheless, preference investors are not entitled to electing the company board representatives. Preference shares also entitle the shareholders to dividend payments before the company is liquidated (Swart, 2002). Whereas ordinary shareholders receive their dividend last upon company liquidation, preference shareholders accounts are settled before the company is wound up. However, preference shareholders are not allowed to participate in electing company board of directors (Swart, 2002). Preference shares have special preference in dividends and on assets in case the company is liquidated.
Convertible note is also a form of hybrid securities that an investor can convert its initial principal amount into equity in the issuing company (Nakisa, 2011). Convertible notes, just like other bonds, have an attached premium value and maturity date. Convertible notes provide interest rates interest terms that offer investors with a choice of holding the notes until the instrument maturity. The convertible notes can be converted into company’s common stock at an interest rate agreed at the time of issuance. If the company is unable or unwilling to repay the investor upon the expiry of the maturity date, legal actions can be instituted by the investor against the company (Nakisa, 2011).
Direct Costs of buying and selling of securities
There are three major direct costs that are incurred in buying and selling of ordinary shares, preference shares, and convertible notes. These costs include brokerage fees, marketable securities tax, and value added tax (VAT). Marketable securities tax applies only to buying transactions (PSG, 2012).
Most of the investors buy or sell shares through banks and stockbrokers. The commission or fees charged for these transactions vary from one stockbroker or bank to another. Furthermore, the brokerage costs are determined by the number of shares being transacted, and the share price. Marketable securities tax is charged on the transfer of shares at a certain fixed percentage of the total taxable amount (PSG, 2012). In some instances, marketable securities tax is referred to as stamp duties. Government may also place VAT charges on convertible notes upon the purchase of the securities in the stock exchange market. Therefore, VAT is a direct cost that investors have to incur in the purchase of government securities (PSG, 2012).
There are chances that an investor can lose his or her entire investment in some of the above mentioned financial securities. This could happen if the company becomes bankrupt or is liquidated. However, the risk of investment loses vary significantly from one security to another.
Ordinary shares are the most risky investment security that an investor can incur huge loses in the event of a company going bankrupt (Swart, 2002). The collapsing company is required to pay all its employees, creditors, lenders, government, and preference shareholders before it closes down. Ordinary shareholders are left to share the residual amounts that are left after such payments have been made (Swart, 2002). This residual amount may not be enough to pay their investment. Sometimes, the ordinary shares held by the investors can also be diluted in case the company issues new shares in the market (Swart, 2002).
Preference shareholders can be ranked second in the order of risks associated with the collapse of the company in which they hold preference shares. Preference shareholders come after the bondholders and before ordinary shareholders in the capital structure of companies. This means that, in case the company is declared bankrupt and wound down, preference shareholders receive their payments after lenders, government, and bondholders have been paid (Swart, 2002). In most cases, they may miss out on the share of their investment if the available capital is used to settle debts and bondholders.
Convertible notes are less risky as compared to the ordinary shares and preference shares. Convertible notes act as a form of a loan that investors lend to the company. This is aimed at shielding the investors from sharing the liability of the company in circumstance of bankruptcy (Copeland, 2010). The only risk to an investor who invests in the convertible notes is that, in case the company is liquidated when the convertible notes had already been converted to equity in the company, the investor will be treated similar to ordinary shareholders. Investors can also lose their investment in convertible notes in the event that the foreclosed assets cannot sufficiently pay the value of the note purchased. From this scenario, the investor may lose out (Copeland, 2010).
Factors to consider in choosing financial asset
Before an investor chooses the financial security in which to invest, it is of great benefit that some factors are considered. An investor may choose to independently or with the guide of stockbroker to identify the factors. The investor need to consider the financial position of the firm by looking at share capital and reserves of the company. The investor can also study the financial performance of the company by looking at the historical financial performance (Stockmarket.com, 2012).
Legal factors need to be considered so as disclose any information regarding the company’s historical issue on bankruptcy, liquidation or closures. Company indebtedness is also considered so as to ascertain whether the company has a huge debt burden or not. Future growth predictions should also be looked at by the investor (Stockmarket.com, 2012). Before investing, the future outlook of the company should be assessed so as to ascertain how sustainable the company promises to be in the future. Finally, an investor should look at the percentage of public confidence in the company before making a decision (Stockmarket.com, 2012).
Preference shares would be bought. Preference shares are preserved in value and have fixed interest rate in the short run. Therefore, return on investment is guaranteed after one month because interest rates are predictable within one month. Ordinary shares are not an option since the dividend payment is the only benefit that accrues and is very unpredictable. Convertible notes interest may be volatile within the month thus not viable for investment.
Investors need to conduct adequate analysis of different financial instruments issued in the stock exchange before making an investment decision. Different instruments have different advantages and disadvantages. The most underlying factor that investors should consider before investing in company securities is stability in growth so as to guarantee returns on investment. From the three instruments discussed, convertible notes and preference shares offer the best investment opportunity to investors regardless of few shortcomings.