The Stock Market

 Financial Markets

How the stock market works

Lemonade company 

A company makes lemonade, each year customers buy more and more because they make better lemonade than their competitors. Then one day customers demand more lemonade than the company can produce. The owner figures it would cost K1000000 to scale up production, so he decides to form a corporation to sell shares in his business to raise the capital. First the owner goes to the state government to obtain a permit to sell shares in his business. 

Next, he goes to an investment banker and shows him the record of the Lemonade company's past performance and plans for expansion. The investment banker decides to help our friend sell shares in his business to raise the K1000000. However, before any shares can be sold, certain information must be filed the Securities Exchange Commission. The investment banker and the owner must swear that the information they filed contains nothing but the truth. Note: registration with the SEC does not imply that the government approves the stock issue as a good investment but only assures the public that if the material statement of the issue are false, punishment will be administered according to the law. 

After the SEC registration is effective, the investment banker pays the owner K1000000 in exchange for the number of shares in the lemonade company. The investment banker then goes ahead to sell shares to member of the public at a price and shows the profits for his services selling the shares. Money received from the sell of shares in the business builds a new factory which produces more and better lemonade. 

The people who bought the stock own proportionate shares in the equipment and all of it's assets. Shareholders elect board members to represent them in board meetings, they determine how the company should be run and the amount of dividend earnings to be paid to the stock owners. When stock holders invest in the business, they expect to receive dividends to pay for necessities of life, a house, fancy car and so on. 

Lemonade Corporation 

After a few short year an increase in demand for the company's product causes the owner a new headache. How can he build more tools to increase lemonade production? It will cost about K10 million to do the job. One way to raise capital is to sell more stock to more people. So the board of the Lemonade company vote to send it's president to the stock exchange to see if their common stock qualifys for listing. 

The corporation wants its securities listed on the exchange so that the additional stock they need to sell can be more attractive to investors all over the nation. Securities listed on the stock exchange can be sold for cash anytime in this market place. Many inquire about the possibility of their securities being listed but only those that pass the close examination of their financial health are accepted.

 The stock listing department examine the financial health of the corporations to be listed on the stock exchange. The corporation must have substantial assets, plant, equipment, cash, there must be a broad distribution of its shares among a large number of stock holders, the corporation must show successful management and sales record and annual net earnings at the time of listing of at least K1 million. The proposed stock issue must meet State and stock exchange regulations. 

The corporation must agree to report to stock holders at regular intervals. If the examination by the stock listing department indicates the corporation meets the minimum requirements of the exchange at the time of examination. The corporations application for listing is recommended. A board of governors of the exchange finally approves the application and sees that it is made public. 

Now that the Lemonade corporation's stock is listed, its name is abbreviated for use on the ticker tape. Each time Lemonade corporation's stock or any other stock on the exchange is bought or sold, the ticker tape flashes all over the nation, price and number of shares traded.

A buyer in Lusaka wants to buy LC stock, the buyers broker sees that the last transaction was at K50 a share, the buyer could buy from 1 to 99 shares to be known as an odd lot, but the buyer decides to buy 100 shares known as a round lot. The broker contacts the exchange, the buy order is telephoned to the top floor of the exchange, it is given to the exchange floor partner who becomes the representative of the buyer in Lusaka. 

The floor partner goes to the desk where LC stock is traded, the representative of the buyer bids K50 per share for 100 shares but at the moment there is no stock offered at that price. In the meantime however, a LC stock holder in Livingstone decides to sell his stock at K50 per share, the sellers broker wires the sell order to the floor of the exchange to the sellers representative. The sellers representative goes to the LC desk and offers to sell 100 shares at K50 per share, now the price is mutually acceptable and the transaction is complete.