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Economics Essay On The Australian Sharemarket And How It Works

1635 words - 7 pages

The Share MarketThe share market in Australia has two main functions. Firstly, it provides a link so that listed companies can receive equity funds to expand their operations and so that the people with the funds can invest and receive return in capital gains and dividends income. Secondly, it provide a market place where buyers and sellers can come together for the trading of shares and other securities at the current market price which has been determined by the forces of supply and demand. The share market also is included in the internal regulation of security exchanges through the ASX (Australian Stock Exchange).The role of the share market can be considered from 3 main perspectives: ...view middle of the document...

When the float of the company is finished, and it is listed on the stock exchange, profits that result from future trade in the company's shares will not go to the company but instead it will go to the firm's shareholders. Therefore, future trading is unable to provide the same benefits for the company ¬- in terms of an increase in capital - as an initial float.When there is competition in the stock market and the number of investors is the same, the competition for the supply and demand of shares is manipulated. For a company to be successful in competing it will need to make itself more desirable and attractive for investors. This will usually mean higher dividends are paid out to the investors, so as to encourage further investment. As the company increases its supply of shares through a float, the price mechanism will adjust the price and set a new equilibrium to help the company compete in a competitive stock market.Stockbroker organizations between the buyer and the stock exchange are common in the share market. These institutions offer a range of services and advice to both investors who want to invest or trade shares, and to the companies offering the shares. These stockbrokers also adhere to a strict code of ethics, offer investment advice on all kinds of securities, and provide financial and future investment plans. These institutions are beneficial because they allow new shareholders to successfully take part in investing in companies and in turn receiving returns through capital gains or dividends. Technological advances in relation to the stock market have been beneficial in making the stock exchange a more reliable and secure place to trade. It is no longer run by hand and tickertape machines; everything is automated and the current share prices can be kept accurately up to date. Shares can also be traded almost instantly without the need to issue a certificate, but the use of a digital certificate instead.The share market has a significant impact on the activity that goes on in an economy. This impact is mostly caused by the purpose of shares to create investment opportunities and in time affect the total pattern of investment.One of the most important impacts of the share market is that it facilitates more efficient investment in the economy. Without the share market or well-developed financial systems in an economy, most of the investment will occur through borrowing. When the individuals in this economy choose not to consume, they save their incomes with intermediary financial institutions and the companies that require investment funds must borrow through these institutions. The problem with this system of lending and borrowing through financial institutions is that only limited benefits are passed on to the individuals saving their income and the companies borrowing funds - as the returns on the savings are usually quite low, and the cost of borrowing is quiet high.This is contrasted to an economy with a share market. A...

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