This is part of a series of articles sponsored by NIC bank. NIC will be having a rights issue starting 27th August. Read more about their rights issue here.
Simply put, a stock market is a market (like the Wakulima Market), only that the products being traded are shares rather than potatoes, maize and beans. Shares of listed companies to be more specific.
To increase its capital, a firm may source for debt financing or equity financing. If the firm chooses the path of equity financing, it may do so by either selling some of its ordinary (or preference) shares to a small group of private investors (called private placement) or it may choose to sell its stock to the public in what is called an initial public offering (IPO) and therefore the shares become publicly traded.
To maintain order, the shares are traded on a stock exchange. This is basically a market where sellers and buyers of different shares (called stocks) meet. Because there tend to be very many shareholders of the various companies, rather than have hundreds of thousands of people meet somewhere (the venue would have to be at least as big as a football stadium, maybe like Uhuru Park) and yell prices and hope a potential buyer seller hears you shout your bid for certain shares and is satisfied with the share price you bid…this is clearly impractical. Nothing would ever get done.
For these and other reasons, stock brokers, licensed by a regulating authority, are given the responsibility to trade shares on behalf of shareholders. The stock brokers carry out the instructions given to them by their clients (shareholders of shares of listed companies) and levy a small commission to the shareholders for the service rendered.
The prices of shares are determined by the forces of demand and supply. When there are many shares of a certain company available and few buyers, the price drops, more people then buy the share attracted by the low price and the price drops to a level where all the shares are bought. Similarly, when the shares of a certain firm are limited in supply, shareholders interested in the stock bid higher prices trying to acquire those few shares, pushing up the prices until higher prices are not bid and all the shares are bought.