Part Two: The Stock Market

Chapter 6. The Marketplace

The stock market, like any market, is where you buy and sell new and second-hand goods, in this case shares in a company. Companies willingly pay a fee for a stock market listing because it is easier to persuade investors to buy shares if they can be sold easily at a later date.

Shares do not have to be traded on a stock market. Supposing you have a bright idea but you do not have the cash needed to make and market the wonderful gizmo that you have invented. You ask your grandma, or Auntie Maisie, or the neighbours, anyone who believes in you to put up the cash in return for a stake in the rewards when your great invention sells like hot cakes.

Alas, grandma dies, you fall out with Auntie Maisie and your neighbours move to the Outer Hebrides and the cash has to be repaid just when you need it most. Wouldn’t it be so much better if new investors stepped forward to buy the stakes of those who want out? If your shares are traded on the stock market, that is exactly what happens.

What is more, people will be far more willing to put their faith and life savings into your venture if they have the reassurance of knowing that, should they want to get out, they can do so readily.

The stock market provides the reassurance that it will bring together buyers and sellers on a trading platform where the price of the transaction will be set according to supply and demand.

The London Stock Exchange

The main exchange for trading shares in the UK is the London Stock Exchange (LSE). Although Antwerp can claim to be the first city in which share trading took place on a large scale, London led the way in adopting a set of share trading rules, and as such was the first formal stock exchange. It remains one of the three most prestigious in the world, alongside the New York Stock Exchange in the US and the Tokyo Stock Exchange in Japan.

Because these three exchanges are in different time zones, it means that from the opening in Tokyo to the close in New York there is a major stock market open somewhere for most hours of most weekdays.

The total number of companies quoted on the LSE is well over 2,000 and they are worth in total nearly £6,000 billion.

In addition to UK companies, over 300 overseas companies from more than 50 countries have their share prices quoted on the LSE to gain access to the finance they need to flourish.

A London listing gives these companies from across the globe prestige. They are attracted by the liquidity of the London market and the balance it offers between encouraging entrepreneurial spirit and imposing sufficient sensible regulations to retain the confidence of investors and quoted companies alike.

Liquidity refers to how active the market is. The more buyers and sellers there are for a company’s shares, and the more trading that takes place, the more liquid those shares are. They flow readily. If trading is active, investors are willing to buy because they know they will have no difficulty in selling whenever they want to.

History of the exchange

The London Stock Exchange began with brokers meeting in London coffee houses way back in the 18th century. Indeed, it can be argued that the issuing of a list of stock and commodity prices in 1698 is the earliest evidence of organised stock market trading in the world.

The dealers had to meet in coffee houses at first because their behaviour was too rowdy for the Royal Exchange, where other commodities were traded.

The first stock exchange premises were established in 1761 and when formal membership, by subscription, was instituted in 1801, the modern stock exchange where members could trade with each other was born. Eleven years later a rule book was created.

It took until 1973 for the first female members to be admitted. In the same year, the regional stock exchanges that had sprung up in cities – beginning with Manchester and Liverpool – were amalgamated into one national exchange.

Big Bang

Since then modernisation has snowballed in the electronic age. Deregulation of the market, known as Big Bang, took place in 1986.

Until then, trading had been a highly complex business, full of restrictive practices such as being able to charge investors minimum rates of commission. Although investors placed their buy and sell orders with stockbrokers, these orders had to be relayed to jobbers on the stock exchange floor. Errors could occur as jobbers misunderstood each other’s orders or scribbled down the wrong details in the hurly-burly of the trading floor.

Everything had to be matched up at the end of the day and disputes were settled by an independent committee.

Brokers – and, in particular, the jobbers who saw their jobs disappearing – forecast that Big Bang would be the end of the world, but in many ways it was the start of the LSE as we now know it.

All member firms became broker-dealers, able to take orders and do the actual buying and selling. Minimum commission rates were abolished, so private investors were encouraged to place orders because they now paid lower charges.

The old octagonal stock exchange building was situated just around the corner from the Bank of England in the main part of London’s financial centre, known as the City. It used to be buzzing with brokers, jobbers, traders and investors.

Now trading is carried out mostly on silent computer screens in offices scattered around the globe, rather than face to face on a market floor, and the LSE has moved into smaller new headquarters in Paternoster Square, close to St Paul’s Cathedral.

The Stock Exchange Electronic Trading Service (SETS) has been established to make trading instantaneous and CREST, an automatic settlement service, clears shares and payments electronically without the need for paper.

The London Stock Exchange used to be owned by its members, such as stockbrokers. It is now owned by shareholders, and its shares are traded on the exchange just like those of any other company.

Trading hours

The London Stock Exchange operates within set hours. At 7am the formal announcements lodged overnight, while the exchange was closed, start to pour out. The intention is to give everyone an equal opportunity to trade on a fair basis. Announcements will continue to be made throughout the day but the overwhelming majority come out as the market opens.

In theory we therefore all start trading on an equal footing. Yes, the professionals in the City are going to be at their desks and ahead of the average punter first thing in a morning so you will, in practice, find that share prices often move before you have a chance to react. However, at least there is some attempt to create a level playing field.

Trading in shares starts at 8am, after the London Stock Exchange has run a complex computer program through to match up any attempted trades left over from the previous night.

Trading then continues right through the lunch hour until 4.30pm.

Announcements continue to be issued until 6.30pm. Most after-hours statements cover directors’ share dealings but occasionally a profit warning is slipped out, perhaps in the hope that the press won’t notice. (The press always does notice and in consequence this underhanded practice is far less common than it used to be.)

Table 7: Summary of London Stock Exchange trading hours

News announcements

The overwhelming majority of announcements are made through the London Stock Exchange’s Regulatory News Service (RNS). This used to be compulsory but other news distributors are now allowed to compete, provided they make the information widely available to newspapers, to wire services such as the Press Association and to financial news websites. The aim is to spread the news to all investors as widely and quickly as possible.

News that has not been released in this way does sometimes leak out into the newspapers. The powers that be discourage this practice. In particular, the ‘Friday night drop’ – in which financial advisers slipped out tasty morsels to favoured Sunday newspaper journalists after the market had closed for the week – has been stamped out.

However, where news genuinely occurs after the stock market has closed, it is permissible for companies to release the information to the press, provided at least two newspapers or news agencies such as the Press Association or Reuters are informed.

Curiously, the tipping off of scribes on the Financial Times, the newspaper read by City professionals on their way to the office, has never been attacked by financial regulators with the same zeal as leaks to lesser publications.

Do not be too angry that the professionals have a built-in advantage. Share prices can be erratic first thing in the morning, and unsuspecting private investors who instruct their stockbrokers to buy or sell at the best available price as soon as the market opens often strike a worse deal than they expect.

If you miss an opportunity, learn to live with it and move on. There are plenty more investments to be made.