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QUESTION:
Explain the major purposes of a stock exchange.
SOLUTION:
Stock Exchange is an agency that provides a way to individual for easy trading of shares, bonds
and other financial securities. Generally the stock exchange has a physical location but it can be
virtual also. When the capital is raised by a company, it is required to compete with many other
companies for investors’ funds. To maximize the demand for its shares, the company is required
to select an appropriate stock exchange. Generally larger exchange means larger market activity.
This implies that a company would want to be a part of largest stock exchange.
The purpose of stock exchange is summarized in following points:
1. Wealth: The stock exchange provides a way for private companies to raise capital and for
individual to enhance their wealth.
2. Forecasting: The stock markets are assumed to be excellent source of intelligence on the
economy. The performance of the stock market has shown a correlation with the future
course of the world economy. It is used as forecasting tool by economists and trading on
stock exchange requires the combination of knowledge and judgment of individuals.
3. Savings: Stock exchange provides a platform for the investment of retirement savings.
The government of United States has provided a special exemption in the tax code for
401k stock investment for retirement. The investment needs to be done wisely because
the level of risk involved is also quite high.
4. Valuation: The listing on stock exchange ensures an appropriate price for the security
which would not be possible in case of private listing. Participating in stock exchange
allows the prices to be fixed by market of investors who each have access to a diverse
range of information. (http://www.money-zine.com/Investing/Stocks/Stock-Exchange/)
QUESTION:
Identify and explain three types of securities that can be traded by individual investors on the
Australian Securities Exchange (ASX).
SOLUTION:
The three types of securities that can be traded by individual investor on the Australian Securities
Exchange are as follows:
http://www.money-zine.com/Investing/Stocks/Stock-Exchange/
1. Warrants: Warrant is the financial instrument issued by banks and other institutions and
is traded on ASX. It gives investors an alternative method to gain exposure to a pool of
underlying assets like shares. They are generally split into investment style products and
trading style products. Various warrants like installments ensure full exposure to
investors with the benefit of share ownership.
2. Exchange Traded Options: Option can be defined as a contract to purchase or sale a
financial product. In case of equity options, the underlying instrument is a share or
exchange traded fund. The contract is exercised at fixed price in future called as strike
price. The contract has an expiration date also and it does not exist after the expiration
date. The options can be of two types call option or put option.
3. Futures: Futures can be defined as the contract to purchase or sale the particular asset or
cash equivalent on a fixed date in future. The future contracts are traded over three share
market indices on ASX namely, the S&P / ASX 200 Index, S& P / ASX 200 A-REIT
Index and the S&P / ASX 50 Index. The future provides the exposure to an index’s
movement for a specified period of time. (http://www.asx.com.au/products/equities.htm)
QUESTION:
Explain how companies go about listing on the ASX.
SOLUTION:
To list the shares of the company on ASX, the companies’ are supposed to meet certain
requirement of ASX. These requirements are called as ASX Listing Rules or Listing Rules. The
listing rules include the following:
1. Admission to the Australian Stock Exchange.
2. Getting the shares quoted on ASX.
3. Regular and periodic disclosure of the important information by the company.
4. Reporting of all the important transactions of the company.
5. On-going requirements to maintain the listing.
6. Circumstances of trading halts, suspension and removal from the ASX.
The listing rules give a standardized trading field for the companies listed on ASX and to other
participants in the market such as brokers, investors, officers of the company, clearing house and
regulators. The standard desired by the ASX and other participants in the market of the company
http://www.asx.com.au/products/equities.htm
is dependent on the extent to which ASX enforces compliance with listing rules.
(http://www.asxgroup.com.au/asx-listing-rules-guidance-notes-and-waivers.htm)
QUESTION:
Briefly explain three listing requirements that are imposed upon companies by the ASX.
SOLUTION:
The three listing requirements that are imposed upon companies by the ASX are as follows:
 Continuous Disclosure. Companies must immediately inform ASX if there is any
information likely to affect the share price.
 The rules governing how new share issues must be worked out.
 How share registries and CHESS registration must be maintained.
(http://www.asx.com.au/resources/listing_rules.htm)
QUESTION:
What is the ASX profit test and asset test and why are these rules in place?
SOLUTION:
Any company seeking admission under official list of ASX i.e. general admission shall satisfy
various conditions including the asset test or profit test.
Profit Test: To satisfy the profit test, the company must meet the criteria in respect of each of the
following:
1. The company must be a going concern....