How to Buy and Sell Shares
Households are a major source of funding for companies that require capital for expansion.
This happens through financial intermediaries like banks, brokers, insurance companies,
pension and provident funds, unit trusts and mutual funds.
Financial intermediaries
match investors with surplus funds with borrowers who need capital to grow their
business.
Let us assume that Mrs. Bull has accumulated a comfortable savings that is currently held
at the bank as a certificate of deposit.
Mrs. Bull decides that only part of this savings
needs to be kept in short-term, liquid instruments in case of unforeseen cash needs.
The
remaining funds may be invested in assets that have potentially greater returns but over a
longer time horizen, for example shares or debentures. Mrs. Bull decides to invest this
money in shares on the Ghana Stock Exchange (GSE), for the potential price gains and
expected dividend income.
To buy or sell shares investors must go through one of the brokers or Licensed Dealing
Members (LDMs).
The brokers meet every day at the GSE to trade with each other.
Investors give their brokers specific instructions or orders as to how to carry out their
transactions and may solicit the advice of their brokers in making these investment
decisions.
Let us assume that Mrs. Bull decides to take her broker's recommendation to purchase
10,000 shares of SCOA.
Also assume that Mr. Bear, who owns shares in SCOA, needs
working capital to expand his business and decides to sell 10,000 SCOAs to meet his
short-term cash needs.
He also must see his broker to effect the sale on his behalf.
Some examples of orders that buyers and sellers could place with brokers include:
Orders with Price Limits
At the market order requires that the broker buy or sell the security at the best available
price;
Limit Order (or limited juice order) requires that the broker buy or sell at a specific price
or better;
Orders with Time Limits
Good Till Cancelled Order (GTC) (or open order) requires that the broker takes the order
to the market at each trading session until it is executed or until the investor cancels the
order.
Orders may also be placed for a single day, week or month;
Orders that Specify Size
Round Lot Order requires that the broker buy or sell shares of a minimum of 100 and in
multiples of 100 thereafter;
Odd Lot Order requires that the broker sell a number of shares less than a round lot.
Special Orders
Discretion Order gives the broker the authority to carry out transactions on the investors
behalf.
All or None requires that the broker fill all of the order at one time or none of the order at
all.
Orders may be made on the spot, by phone or by mail depending on the relationship
between the investor and his broker.
Prices of securities are determined during the
negotiation between brokers attempting to get their clients the best price. The brokers
charge a commission for their services, which include not only executing specific
transactions, but providing advice and information on the market and specific securities.
The commissions vary with the size of the investment. There is also a GSE levy which is 0.5
percent of the transaction value.
At the Exchange, the brokers will make offers and bids for SCOA based on the instructions
given by Mrs. Bull and Mr. Bear.
If Mr. Bear is willing to sell his shares at a price lower
than or equal to the bid price, then the shares will trade. Once the deal is struck Mrs. Bull is
liable to pay to the broker the price for 10,000 SCOAs, plus the brokerage commission and
GSE levy. Mr. Bear is entitled to receive from his broker the proceeds from the sale less the
brokerage commission and GSE levy.
Price Limits
The GSE limits the fluctuation in share prices during a given trading session to five percent.
Bids and offers at prices that fall outside the limits are still given by the brokers, as these
indicate the price levels at which investors have interest, irrespective of the limits.
If no
shares traded during the previous session, then the chairman of the call-over, that is the
GSE officer presiding over trading, may change the limits and widen the band.
These
price limits are not meant to limit trading but to avoid wild price fluctuations during a
trading session.
Code of Conduct
The brokers must adhere to a strict Code of Conduct imposed by the GSE, which if violated
could result in their suspension or expulsion from the Exchange. The brokers must deal
with their clients in strict confidentiality. Although brokers may deal for their own account,
they are required by the GSE to give priority to clients' orders.
Unit Trusts & Mutual Funds
If you have a few cedis, it may be more cost-effective to put the money into a unit trust.
Mutual funds, Unit trusts and "investment trust companies" are operated by brokerage
firms or professional investment managers.
They pool together many small savings so
that the funds, and therefore the risk, may be spread over a broader range of investments.
These funds are priced according to the prices of the individual shares in the fund, and a
management fee is levied off of the profits.
The OTC Market Shares
Apart from shares listed at the GSE, investors can also invest in non-listed shares. Shares of
public companies that are not quoted at the GSE can be traded in the over-the-counter
(OTC) market through banks and brokerage firms, the market intermediaries. This market
is not as organized as the GSE and the investor does not enjoy as much protection.