The Australian Securities Exchange
Shares in companies are commonly referred to as ‘stock.’ A stock exchange is a market in which shares in companies are bought and sold. Stock exchanges allow shareholders to trade in shares. This ability to trade in shares is a key feature of public company ownership. For this reason, the existence of a market in which shares can be traded is essential.
In the absence of a market in which shares could be traded, investors in a company would only have access to an income return (dividend). On a stock exchange, the investor can sell their share in the company. This creates the possibility of a capital return for the investor. Because there is a vehicle for both capital and income return, the pool of investors who are interested in investing in the company is larger. Thus, by having shares that can be traded on an exchange, a company increases the amount of money it can raise through the issue of the shares.
Companies with shares traded on a stock exchange are said to be listed on the exchange. Stock exchanges exist in all economies in which public companies exist. In Australia, various stock exchanges arose as the economy expanded in the second half of the 1800s. The finding of gold, in particular, spurred the rise of many small exchanges trading mainly in mining companies. As economic cycles progressed, many of these exchanges ceased to trade, and by 1987 there were six stock exchanges in Australia – one in each state capital. Federal legislation was then passed that there was to be one national exchange, and the Australian Stock Exchange was formed.
A stock exchange is what is known as a ‘secondary market.’ The word secondary refers to the fact that the initial transaction of shares occurs between the company and the original shareholder. This primary transaction is referred to as an issue of shares. The existence of a secondary market in which shareholders can buy and sell makes shares more attractive to shareholders. Because of the difficulties in disposing of shares, shareholders who hold shares in private companies are limited in the manner in which they can earn a return: essentially their fortunes are tied to the performance of the company. If the company does well, they make a return. If it doesn’t, there is no return and the investor may even lose their money.
In addition, whether the company performs well or not, the investor in a private company has to await the company’s performance before discovering whether they will get a return, and how much that return will be. This makes the shares in private companies relatively ‘illiquid.’
Having a secondary market in which shares can be exchanged limits this risk. The secondary market opens up new avenues for return, as shares can be traded whenever there is a willing buyer. This opens up the prospect of capital returns which can only be accessed in limited ways with private shareholdings. Thus there are more sources of return, and more frequent (often constant) opportunities to realize these returns.
The benefits made available to investors via the secondary market tend also to benefit the companies: they are able to raise more funds directly through their issues because investors are more likely to invest (and are likely to invest more). It is largely to gain these benefits that companies ‘go public.’
The following table shows the relative size of various stock exchanges around the world, as of January 2016. The table was sourced from the World Federation of Exchanges:
|Exchange||Market Capitalisation ($US Million)|
|NYSE||19 222 875.6|
|Nasdaq – US||6 830 968.0|
|Japan Exchange Group||4 485 449.8|
|Shanghai Stock Exchange||3 986 011.9|
|Hong Kong Exchanges and Clearing||3 324 641.4|
|Euronext||3 320 992.0|
|Shenzhen Stock Exchange||2 284 728.1|
|TMX Group||1 938 630.3|
|Deutsche Boerse||1 761 712.8|
|BSE India Limited||1 681 712.4|
|National Stock Exchange of India||1 641 716.5|
|SIX Swiss Exchange||1 515 760.8|
|Australian Securities Exchange||1 271 697.3|
|Korea Exchange||1 251 053.9|
|NASDAQ OMX Nordic Exchange||1 212 039.9|
|Johannesburg Stock Exchange||950 662.6|
|BME Spanish Exchanges||942 036.2|
|Taiwan Stock Exchange Corp||860 627.5|
|Singapore Exchange||755 414.8|
|Saudi Stock Exchange (Tadawul)||510 694.6|
As can be seen, the Australian Stock Exchange is the world’s 13th largest stock exchange. The two largest were both in the USA, with the New York Stock Exchange alone comprising roughly 26% of the total world exchanges.
The Australian Securities Exchange
The Australian Stock Exchange (ASX) was originally a mutual organisation owned by stock brokers (ie the people who traded stocks on the exchange). In 1998 it demutualised and became a public company, which is now listed on its own exchange. This listing is subject to various conditions. For example, no one shareholder can own more than 5% of the ASX.
As the owner of the exchange, the ASX has legislated responsibility for supervising the companies whose shares are traded on it. ASIC performs this supervisory function for the ASX.
In these materials, the term ‘ASX’ is taken to mean the actual exchange, rather than the company which owns the exchange, unless otherwise stated. In addition, while there are some small stock exchanges that operate in different parts of Australia, the fact that the ASX is the only national exchange and accounts for almost all of the public share transaction in Australia means that these materials will address the ASX unless otherwise stated.
The ASX is governed by a set of rules designed to protect the integrity of the market. Breaches of the rules can lead to a suspension of trade in a particular company’s shares. These rules include the need to notify the market of all information that may influence the behaviour of investors. This requirement is constant, and known as ‘continuous disclosure:’ information must be made available to the market in a timely manner, regardless of when it arises.
Information is usually made available to the market via ‘information releases’ developed specifically to meet this requirement. These releases are forwarded to the ASX, who make them available in various ways to the trading public. For example, releases to the ASX can be accessed via their website, at www.asx.com.au. In addition, all companies have minimum reporting requirements, including annual sets of financial statements. These statements must be prepared in accordance with designated Accounting Standards, and must be audited by a suitably qualified person or entity.
The ASX also provides a monitoring function. Much of this function is designed to prevent what is known as ‘insider trading.’ Insider trading refers to cases where a person uses information that is not available to the general public, and which they have obtained through some association with a company or its officers, to inform their decisions to trade in particular shares. This ‘inside knowledge’ gives the person who holds it an unfair advantage over the rest of the market.
For example, a person who knows that a company is about to report a large fall in profits might sell their shares before the rest of the market becomes aware of the reduced profits. When the market does become aware of the fall, the price of the share will typically fall. By selling before the company announces its reduced profit, the inside trader sells at a higher price than subsequently is available.
The ASX conducts monitoring which aims to identify ‘irregularities’ in the trading of shares in listed companies. For example, a sudden spike in the share price that is not explained by market conditions will attract the ASX’s scrutiny. The ASX will ask the company for an explanation. Companies are bound to respond within certain time frames and via a particular format.
Market Indicators – Indices
There are over 2200 separately listed entities on the ASX. This large number of companies can make it difficult to gauge how the value of shares in the market is generally performing. To make this assessment, various indices of prices are used. Indices are devices that can be used to measure general changes in the value of many things. The consumer price index (CPI), for example, is the leading indicator of inflation used in Australia.
In the stock market, indices are calculated as follows. At some base point in time, the value of the shares of all the companies that are going to be used within the index is collected. This value is measured by the number of shares that exist, multiplied by the current market price for those shares. This total figure is then expressed as a percentage of itself. At the base point, the total figure will be 100%.
Multiplying the number of shares on issue by the share price allows a company’s ‘market capitalization’ to be calculated. Market capitalisation is the total market value of all the shares on issue. For example: assuming an index is going to include three companies, and that the 1st of January 2016 will be the starting point of the index, the following data would be collected:
|1/1/2011||No of shares on issue||Price per share||Market Capitalisation|
On the first of January 2016, the total value of the shares is $89,900. This figure will be used as the basis for comparison for the index. The formula for calculating the index is as follows:
Index = (Current market value/base market value) x 100
(The multiplier of 100 is used when we want the base index value to equal 100. Several of the key market indices used for the Australian stock market used a multiplier of 500, giving a base index value of that amount. Larger base index values allow the index to be more sensitive in the way it measures change.)
On the 1st of January 2016, the index will equal 100. This is because the current market value is the same as the base market value. On the 2nd of January, the following changes occur to the companies in the index:
|2/1/2011||No of issued shares||Change in Price||New Price per share||Market Capitalisation|
|Company A||10,000||▲ 15c||$3.35||33,500|
|Company B||100,000||▲ 4c||49c||49,000|
|Company C||10,000||▲ 3c||$1.32||13,200|
To calculate the index we now divide $95,700 by $89,900 and multiply by 100. This gives us an index of 106.45 points. This reflects that the market value of all the shares in the index rose by 6.45%. This makes sense, as all of the shares in the index rose.
Then on the 3rd of January, the following changes occurred:
|3/1/2011||No of shares on issue||Change in Price||New Price per share||Market Capitalisation|
|Company A||10,000||▼ 15c||$3.20||32,000|
|Company B||100,000||▲ 4c||53c||53,000|
|Company C||10,000||No change||$1.32||13,200|
The total value of the shares has now risen to $98,200. Dividing this amount by the base figure of $89,900 and multiplying by 100 gives us an index of 109.23 points.
On day 3, the index is higher than on day 2. This is because total market capitalisation rose on day 3. This was despite the fact that one share didn’t change in value, and another share actually fell in value. The share that rose – company B – already had the highest level of market capitalisation. A rise in the price of the share that already had the highest level of market capitalisation had a disproportionately large effect on the whole index.
While the index on Day 3 is 109.23, the percentage rise on day 3 was only 2.6%. This is the percentage difference between day 2 and day 3. Periodic changes such as these are often more informative than raw numbers. For example, reporting that an index is currently valued at 600 points tells the investor little: they do not know when the base period is, nor do they know what recent trading levels have been. But to report that an index rose by 1% during a period tells the investor what the change in the market value of the underlying shares was for the stated period.
Because it moves in proportion to the movements of all of the shares that are included in it, an index provides a neat and easy way to summarise the price movements of all the shares in the index. It is much easier to say that the index rose by almost three points (as it did on day three in the above example), than it is to give the relative movements of each share which comprises the index. This is all the more so when there are large numbers of shares being considered. The common indices on the Australian Stock Exchange often include large numbers of shares. These indices are discussed in the next section.
Common Market Indices
The following indices are the most commonly cited indices from the ASX.
|Name of Index|
S&P/ASX Midcap 50
S&P/ASX Small Ords
Most of the indices are compiled jointly by the ASX and Standard & Poors, an international ratings agency. The names of the indices typically describe the types of company that are included in the index. For example, the All Ordinaries index contains the ordinary share issues of the 500 largest companies – measured by market capitalisation – trading on the Australian Stock Exchange. Shares in these companies represent 99% of the total value of the Australian Market. Similarly, the property trusts index contains only those companies which are listed property trusts.
The S&P/ASX 200 index contains the shares of the top 200 companies by market capitalization. These companies represent around 80% of the total value of the market. The fact that 200 companies account for such a high percentage of the total market capitalisation is a telling figure in light of the fact that there are over 2200 companies listed on the exchange. It demonstrates that most listed companies are in fact very small. The dominance of a relatively small number of large companies is a feature of most major stock exchanges around the world. (Indeed, within the ASX 200, shares from just one company – the Commonwealth Bank of Australia – account for almost 10% of the total index value).
The ‘All Ordinaries Index’ is often cited as a proxy for the entire market. This is because it accounts for approximately 99% of total market capitalisation. As of January 2016, the value of the All Ordinaries Index is around 5,000 points. The current index uses a base from the year 1983, when the initial value was 500 points. This means that, since 1983, the value of the shares contained within the index has risen by around 4,700 points. This represents a rise over the period of 940%. To put this in some perspective, inflation over the same period has seen general prices rise by less than 400% (source: www.rba.gov.au). This shows that the real value of the share market has increased by more than 500% in real terms since 1983.
Indices as a benchmark for Share Performance
Indices have at least two main uses. First, as described above, they provide a neat and reasonably user-friendly indication of general market performance. Increases or decreases in an index show the direction in which the market as a whole is moving. The percentage change in an index shows the percentage change in the shares measured within it.
Second, indices provide a benchmark against which the performance of a particular market-related investment can be compared. By comparing the return for a particular investment (for example, a specific share) with the performance of an appropriate index, an investor can make a more informed decision about whether the specific investment has performed well. For example, if a managed fund that invests solely in shares earns 10% for a year, this may or may not be the sign of effective management. If the entire market, as measured by an index, also rose by 10%, then the managed fund has done as well as the market as a whole. If the index rose by less than 10%, then the fund might be said to have performed well, as it ‘beat’ the market as a whole. If the index rose by more than 10%, then the fund may be seen to have performed poorly, as it did less well than the market in general.
If an index is to be used as a benchmark, care needs to be taken to ensure that the index is relevant to the thing with which it is being compared. Note too that indices can be substantially affected by changes in relatively few stocks. As described above, 200 companies account for 80% of the total value of the Australian Share Market. A change to the value of any of these companies can have a significant impact on the index within which they are measured. It is possible, for example, for a few large companies to move in one direction while every other share moves in the opposite direction. Because these few companies are relatively large, they will have a more substantial effect on the index. The index might follow these large companies, even though most companies are moving in the opposite direction.
Trading Shares on the ASX
Shares are traded via the ASX’s trading system known as ASX Trade. This is a fully computerised trading system, which means that transactions are processed electronically. Orders to buy and sell are input by brokers, and ASX Trade matches them.
The specific machinations of the ASX Trade system are beyond the scope of this training, but students wishing to know more can download several articles from the ASX website here.
There are many millions of shareholders in Australia. In a market this large, it is not feasible for individuals to represent themselves in the market. To do so, they would need to forge relationships with each potential trader. Therefore, people who wish to participate in the market do so via an agent. These agents are known as stock brokers.
The traditional role for brokers is to facilitate the coming together of buyers and sellers, who otherwise find it hard to identify each other. Brokers advertise themselves, and buyers and sellers engage the broker to buy or sell on their behalf. When the broker matches a buyer and a seller, this is known as ‘making a market.’ The broker then performs the administrative tasks of the transaction. For this they retain a fee.
All trades on the ASX must be made through a licenced broker. ASIC oversee the licencing regime for brokers. Brokers with a licence to trade are governed by strict prudential standards. These standards mean that those trading with a broker can trust that the broker has done the necessary background work to ensure that the trade will actually proceed. This allows for the speedy completion of trades even for large amounts of money.
As well as executing the instructions of their clients, brokers sometimes use their market knowledge and experience to provide advice to people wishing to trade in the market. And of course, brokers can act in the market on their own behalf. When they do so, there are special rules that govern their conduct.
The modern era of stock broking has seen many changes in the industry. The introduction of electronic trading saw the matching of buyers and sellers became automated. The introduction of the internet allowed for further automation. Online trading allows the investor to input the details for their desired trade directly into the computer system of their broker. This system then forwards the data to the ASX Trade system. When a trade is completed, payment is made via direct debiting or crediting of the investor’s pre-specified bank account. The process greatly increases the efficiency of the broking process, and typically allows the trade to occur for a much lower fee.
The ASX publish a list of all licenced stockbrokers. This list is searchable according to the needs of the user of the list.