The share market

Financial Management Goals

  • Maximize Shareholder Wealth

    • The primary goal of financial management is to enhance the wealth of owners or shareholders.

    • Maximizing shareholder wealth aligns with maximizing the corporation's value.

    • This can also be expressed as maximizing the corporation's share price.

    • Higher share prices indicate greater wealth for shareholders, and corporate value equals the number of shares multiplied by the share price.

Types of Companies

  • Private Companies

    • Limited number of shareholders.

    • No market for shares; infrequent trade of shares.

  • Public Companies

    • Shares available for public purchase, yet there is no organized market, leading to infrequent trades.

  • Listed Public Companies

    • Shares are traded on a stock exchange, allowing the true value of shares to be determined in an organized market.

Capital Markets

  • Definition: A market where financial assets, such as shares, are traded.

    • Contains two types of markets:

      • Primary Market: Shares are first created and sold directly to the public.

        • Example: Initial Public Offering (IPO).

      • Secondary Market: Shares are bought and sold after creation; transactions do not involve the issuer.

        • Main example: Stock exchange.

Primary Market Mechanisms

  • Public Offer

    • Invites the public to subscribe to shares; includes IPOs for first-time listings and subsequent public offers.

    • Involves advertising, preparing a prospectus, and processing applications.

    • Advantages: Ability to raise substantial capital.

  • Private Placement

    • Shares offered to a limited number of large investors (e.g., pension funds).

    • Advantages: Quicker and less expensive compared to public offers.

    • Disadvantages: Requires selling shares at a discount and dilutes existing shareholders’ ownership.

  • Rights Issue

    • Existing shareholders invited to apply for new shares; may be renounceable or non-renounceable.

    • Renounceable: Shareholders can sell their rights; non-renounceable: rights are forfeited if not exercised.

    • Advantages: Prevents dilution of ownership if shareholders buy newly issued shares or sell their rights.

Secondary Market Trading

  • Functionality

    • Facilitated through the stock exchange, offering liquidity and the ability to convert investments to cash.

    • Fair value of shares is determined through supply and demand dynamics.

  • Advantages for Issuers

    • Increased likelihood of primary market sales as investors prefer shares that can be sold later.

    • A mechanism to establish fair market price aids the issuance process.

    • Rising share prices reflect effective management in increasing company value and maximizing shareholder wealth.