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Australian Stock Exchange

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Introduction

Recent decades have seen an extraordinary surge in the level of share ownership in Australia. According to the Australian Stock Exchange, Australia has more shareholders per head of population than any other country-with over half the adult population now holding shares. This has made the operation of the share market an increasingly important aspect of the every day lives of many Australians, and a more important part of the market economy. The share market has two key roles in Australia's financial system. Its first role is to allow companies to raise funds by selling new shares to investors. A share, also known as an equity security, is a financial asset that gives its holder part-ownership of a company. The share market's second role is to allow a company's existing owners, known as share holders, to sell their shares to those who wish to buy a stake in the company. For a firm to issue shares, it must be a company- ie. it must be 'incorporated'. An incorporated business is one that is recognised as a separate legal entity from those individuals who own or manage the business. The share market deals only with the trade in shares of public companies (one whose shares are not subject to any transfer restrictions). ...read more.

Middle

The share market also allows companies to sell new shares to the public. When a company decides to list itself on the stock exchange it must set about offering its shares to the public for the first time. This process is called a float, or an initial public offering (IPO). Whenever people purchase shares in a float they are actually investing in that company. It is often beneficial for a company to float itself to access funds for investment without having to earn these funds as profits or having to borrow them from a financial institution. Additionally, once a company has listed, it can access further equity funds at any time by issuing an approved prospectus for the release of new shares. Share market values are often an indicator of a country's economic conditions. Because market prices rise in accordance with new and better economic prospects for companies, rising share prices will generally suggest that the economy is enjoying good conditions. By contrast, an economy that is moving towards recession will have fewer economic opportunities for companies, leading to lower share prices. A downturn or upturn in the share market can be measures by the All Ordinaries Index, which measures changes in the overall value of companies listed on the ASX. ...read more.

Conclusion

When one type of asset is performing well, demand for that asset is likely to increase, raising its price compared with other assets. By contrast, when an asset does not perform well, demand for that asset with fall, lowering its price compared with other asset. Investors often participate in the share market for speculative reasons and shares may be sold quickly after their market price rises. This creates a speculative bubble, in which shares prices are driven by speculation rather than financial performance. In Australia, the bursting of the 'dot.com' share price bubble in 2000 saw the Stock Exchange's IT Index fall by around 60%. The performance of the share market is closely associated with the business cycle. Despite the similar trends between the level of economic growth and the share price, the relationship between the two is neither simple, nor direct. Rather, it is a two-way relationship: economic conditions influence share prices, but share prices also influence economic conditions. In fact, the share market often amplifies changes in the business cycle. When the market experiences a downturn, it is likely that shareholders will feel less confident about their economic prospects (as their wealth has fallen). The share market has become an increasingly important part of the operation of the market economy. The share market is an efficient way for companies to raise funds needed for growth, and for individuals or other businesses to gain returns on their surplus funds. ...read more.

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