Buying and Selling Shares on the - Bank of Sierra Leone

<strong>Buying</strong> <strong>and</strong> <strong>Selling</strong> <strong>Shares</strong>on the Sierra Leone InterimStock Trading FacilityWhen you buy shares in a company you quiteliterally take a share in the ownership of thatcompany. There are two ways in which you can dothis. You can either buy new shares when acompany sells them for the first time to raisemoney to invest in the business (the primarymarket), or you can buy existing shares from anindividual or an institution that wishes to sellthem (the secondary market).The Role of the Sierra Leone Interim StockTrading Facility - A Regulated MarketThe Interim Stock Trading Facility will performthe functions of a stock exchange until thenecessary legal <strong>and</strong> regulatory framework for afull-fledged stock exchange is put in place.The Stock Trading Facility will exist to providea central, regulated market where stocks <strong>and</strong>shares can be bought <strong>and</strong> sold safely.It does this in several ways:• providing a trading floor;• helping to create liquidity in sharesby bringing together buyers <strong>and</strong> sellersin one place;• ensuring transparency, by publishinginformation about companies, shareprices <strong>and</strong> trades; <strong>and</strong>• through its rules <strong>and</strong> regulations,creating a level playing field for allparticipants.The Stock Trading Facility is responsible bothfor the primary <strong>and</strong> secondary markets. Thismeans that it determines which securities may beadmitted to trading on the Facility, <strong>and</strong> ensuresthat all participants conduct their businessaccording to the rules <strong>and</strong> regulations. It hasthe power to investigate <strong>and</strong>, if necessary, todiscipline anyone who breaks those rules.The Role of Licensed Stock Brokers <strong>and</strong>DealersAll trading must be undertaken by licensed StockBrokers. Stock Brokers are firms or qualifiedmembers of such firms, which are authorised bythe Bank of Sierra Leone to buy or sellsecurities on behalf of their clients accordingto their instructions. The broker must operateaccording to the Rules <strong>and</strong> Regulations of theInterim Stock Trading Facility, which aredesigned to protect investors from fraud orunfair dealing.Brokers may simply buy or sell shares asinstructed, but they can also give tradingadvice to their clients, <strong>and</strong> will provide up-todateinformation about the securities traded inthe market. The broker will charge a fee, orcommission for providing these services. Dealersare brokers that are additionally authorized tobuy <strong>and</strong> sell shares for their own accountHow to buy or sell sharesTo buy or sell shares in the market you willfirst have to register with a stock broker –currently two firms are ready to providebrokerage services. These are listed at the endof this document.When a stockbroker has an order from a client,he will buy (or sell) the shares at the bestprice available on the trading floor of theFacility. When the deal is completed, the brokersends a contract note to his client confirmingthe details of the transaction, such as thenumber of shares bought or sold, the price ofthe shares bought or sold, <strong>and</strong> the commissiondue.Once payment has been made for the shares <strong>and</strong>the transaction is complete, the buyer willreceive a share certificate as proof ofownership. Details of every listed company’sshareholders are maintained by an institution orindividual known as a registrar. If you do notget your name registered for the newly boughtshares, you are not a legal owner of thoseshares <strong>and</strong> you will not be entitled to receiveany dividend or to vote at AGMs of the company.What determines share prices?Various factors can combine to determine theprice at which shares will be traded. Some ofthe most significant are:• Supply <strong>and</strong> dem<strong>and</strong>As in any market, if the number of peoplewishing to buy exceeds those wishing to sell,the price will rise. Of course, the reverse isalso true. Institutional investors tend to havea significant impact on a share price, becausethey will deal in much larger quantities thanprivate investors.• The performance of the companyIf, for example, a company puts out a warningthat business conditions are difficult, itsshares will often drop in value as investorsanticipate a fall in profits. If, however, acompany announces that it has signed a major newcontract, the shares are likely to rise invalue, with expectations of increased profits.It is important to monitor this information on aregular basis.• General economic outlook <strong>and</strong> associatedinvestor sentimentThe health of the national (<strong>and</strong> regional)economy has a fundamental influence on shareprices because it will have an impact on companyprofits. Very broadly speaking, if the economyis growing, company profits can be expected toimprove <strong>and</strong> shares become more highly valued.Investors will be made likely to have higherlevels of disposable income which they will be

more inclined to invest in shares. If theeconomy is weakening, then levels of disposableincome will be reduced, company profits will bemore likely to fall, <strong>and</strong> share prices can beexpected to follow suit.• Interest ratesInterest rates generally affect the cost tocompanies of borrowing <strong>and</strong> so can impact ontheir profitability. However, different sectorsof the economy may be affected in differentways. For example, a rise in interest rates canbe bad news for house builders as people feelless confident about taking on debt to buyhouses. On the other h<strong>and</strong>, pharmaceuticalcompanies are less likely to be affected asdem<strong>and</strong> for medicines is generally less affectedby the strength of the economy.• Press CommentPositive or negative coverage of a company inthe press can influence investor sentiment <strong>and</strong>consequently the share price.The two Discount Houses, who may be licensedvery soon to operate as Dealing Members in theSierra Leone Interim Stock Trading Facility, areFirst Discount House Limited17, Wallace Johnson StreetFreetownSierra LeonePhone: 22 9707 076 601 108Email: discount@sierratel.slCapital Discount HouseLamina Sankoh StreetFreetownSierra LeonePhone: 22 53 57 22 53 97Email: cdh@sierratel.sl• TaxesTax Policy of the government is anotherimportant factor affecting share prices. If thegovernment imposes a tax on a certain sector ofthe economy, the net profit of businesses onthat sector will be affected which in turn willaffect these share prices.2