The Role of a Stock Exchange
A stock exchange allows companies to raise funds by providing them with access to a pool of private and institutional investors.
An exchange’s role in financial markets is pivotal for the development of the financial industry.
Through Primary Markets an Exchange:
1. Brings companies and investors together.
An exchange, through its trading system or platform connection with brokerage firms and banks, allows financial intermediaries to distribute company shares, bonds or financial products to retail and institutional investors.
2. Enables issuers and companies to raise new capital.
Companies have many options to raise capital. For example:
- that is to say generation of one’s own capital from one’s own income, instead of acquiring it from external resources (i.e. investors)
- are the most “traditional financial resources”, normally used to finance smaller projects. For example, supermarkets use generated cash flows for self financing as they pay creditors 2 months in arrears.
Fund raising options such as Private Equity and IPOs are used to finance extraordinary events such as mergers and acquisitions to support companies in key moments of their growth.
3. Facilitates the process of investors subscribing in shares (securities)
Investors can easily access the trading platforms and decide to invest at their convenience shares of a company.
4. Provides capital to companies and investors
To allow a company to be listed, Exchanges require that the company responds to eligible criteria and also some “substantial” financial and strategic standards.
Eligibility criteria normally depend on segment and the market which companies have access to and are normally linked to a company’s balance sheet certification, to its governance, capitalisation and free float.
However, substantial financial and strategic standards may be even more relevant, particularly in the company’s admission phase onto a specific market. The following company values are some examples of substantial requisites:
Drive towards value creation
Clear strategy, reported in the business plan
Good competitive positioning
Balanced financial structure
Good internal organisation
It’s critical for those companies who want to come to the market to achieve both formal and substantial requisites, formal requisites only will not lead to strong interest from the market.