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Talking Finance: Stock, shares and the exchange explained

Talking Finance: Stock, shares and the exchange explained

Today The Post launches a new weekly column by Anthony Galliano, president director of Covenant International Management. The aim of the columns is to put into simple terms the workings of the financial markets. We start at the beginning, with an explanation how a stock market operates.

THE launch of Cambodia’s stock exchange, scheduled for July, will be a monumental step in the development of the capital markets and the economy.

The capitalisation and financing of businesses in Cambodia is typically in the form of privately held equity, by individuals, the government, or investors, where the owner or owners finance the company with their own funds.

Banks also play a vital role to businesses by providing financing in the form of debt, another valuable source of capital in addition to equity.

The arrival of the stock market will provide companies with the facility to raise capital through the selling of shares, or ownership in their business, to investors.

The general population will be able to invest in Cambodia’s businesses and become stakeholders. This new form of equity ownership may well be a new concept to both companies and potential investors alike and significant educational efforts will be required to ensure the stock market is a success. Companies may wish to raise capital for business expansion, new projects, or simply because the present owners wish to monetise their ownership.  

A company can issue stock, or shares, in the company which entitles the owner of the shares, or the shareholder, to a fractional part of the company. The shareholder generally has pro rata control of the company, and the right to profits and capital gains.

Shares are different than bonds in that bondholders are lending money to the company for a period of time and are compensated with interest and an expectation of return of money lent.  Shares can be sold to private investors or to the general public.

When a company initially offers its shares, it does so through an initial public offering, or IPO, in the primary market and the issuer of the shares receives the money from the investors. Issuers of shares usually retain investment banks to assist them in the administering of the IPO offering, obtaining regulatory approval, filings and selling the shares to investors.    

The stock exchange then plays a vital role for investors who wish to buy and sell shares of companies. A stock exchange is an organised and regulated financial market for the trading of company shares and other types of securities at an agreed price.

In order for a company to be listed on an exchange it must satisfy stringent listing requirements, which are a set of conditions imposed by the exchange. The stock exchange serves both the primary and secondary market, where companies can issue shares and in the aftermath the holders of the shares can sell them to other investors for cash.

Therefore the stock exchange provides liquidity for investors and the facility to quickly and easily buy and sell shares. Almost all exchanges trade on an auction basis where buyers enter competitive bids and sellers enter competitive offers. Investors place trades through regulated stock brokers who are either members of the exchange directly or execute the trade as agent through a member.