A review of the determinants of share prices.

Author:Sunde, Tafirenyika
Position:Report
 
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INTRODUCTION

The stock exchange has been perceived by many as the backbone for most contemporary economies, serving a critical need of raising capital funds for companies at a reasonably low cost as compared to other sources of finance such as borrowing. The stock exchange serves two critical functions; it provides a critical link between companies that need funds to set up new businesses or to expand their current operations and investors that have excess funds to invest in such companies and it provides a regulated market place for buying and selling of shares at prices determined by supply and demand, not withstanding other macroeconomic fundamentals such as interest and inflation rates. To meet their short-term cash requirements corporations usually borrow from banks. However, when corporations need long term financing they may sell their ownership interests in the company to the public, or borrow from the public by selling bonds. Stocks exist to enable companies in need of long term financing to sell pieces of their business as stock (equity securities) in exchange for cash. This is the principal method for raising capital other than issuing bonds. These publicly held shares could be traded to other investors on the stock market. The Zimbabwe Stock Exchange (ZSE) has become very important as an investment vehicle for both local and international investors especially after the introduction Economic Structural Adjustment Program (ESAP) in 1991 when borrowing rates increased to levels above one hundred percent. This study will try to unravel the major qualitative arguments of stock prices on the ZSE.

Origins of the Zimbabwe stock exchange: According to Zimbabwe Stock Exchange (ZSE), the first Stock Exchange in Zimbabwe was opened in 1896 in Bulawayo. It only operated for six years before it closed. The present ZSE was also founded in Bulawayo in 1946. In December 1951, a second floor was opened in Harare. In January 1974 the Zimbabwe Stock Exchange Act was promulgated which formalized the establishment of the present ZSE with its head office in Harare. A revised ZSE Act was published in 1996 as Chapter 24.18 (8).

The study also attempts to investigate the factors to be considered by one who wants to invest on the stock market. It has to be realized that there are many arguments that determine the share price or the general performance of the stock market: And these could be social, economic or political. This study, therefore, wants to identify all these factors so that future investors are guided as far as investment on the stock market is concerned.

Why companies go public?: According to Kelly (2), (9) a company is likely to seek a listing on the stock exchange for all or some of the following reasons:

* to raise further capital

* to enable the company's owners to liquidate a portion of their investment

* to enable public trading in the shares of the company to take place

* to facilitate the establishment and operation of a staff share option scheme

* to gain the prestige associated with a stock exchange listing as perceived by investors, customers, suppliers and employees

Once a company has been listed on the stock exchange it does not necessarily mean that it will permanently remain on the stock exchange. The stock exchange has the right to suspend trading in the shares of any listed company at any time for the following reasons:

* a company may no longer satisfy the minimum requirements for listing, for example it may have become technically insolvent

* a listed company may have failed to comply with requests by the stock exchange to conform to certain requirements

* a listed company or companies may become involved in merger, acquisition, restructuring or similar issues likely to materially affect share prices

In the year 2004 alone the following companies were suspended from trading on the ZSE for one or more of the above reasons: Barbican Bank, CFX Bank, First Mutual Limited, Trust Bank and Trans Zimbabwe Industries (TZI). When you buy shares in a company you own a part of that company and you may benefit by getting part of the profits of that company as dividend payments. Growth in the value of the company is reflected in the value of the shares that you hold.

MATERIALS AND METHODS

The focus of this review is the determination of stock prices in Zimbabwe...

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