More on JSE as manager of the market

QUESTION: I was reading The Sunday Gleaner on January 15, 2012, and in particular the advisory column, 'Where do I buy stock?' You have opened up my mind but I would like more information about the Jamaica Stock Exchange. I am 21 years old, I attend the Jamaica-German Automotive School, and I work.

- E. Clarke

PFA: The Jamaica Stock Exchange (JSE) is a public limited liability company. It began operations in February 1969 with one of its primary roles being to promote the development of a vibrant capital market. Additionally, it was to ensure orderly trading in listed securities such as stocks, bonds and preference shares.

It is governed by a board of directors which is made up of independent and non-independent members. The former may be drawn from the Ministry of Finance, Bank of Jamaica, Institute of Chartered Accountants of Jamaica, Jamaican Bar Association, Private Sector Organisation of Jamaica, and other organisations able to make worthwhile contributions to its deliberations.

The non-independent members represent the member-dealers of the JSE. The board also monitors the activities of the stock market.

The JSE conducts trading on an electronic platform, so it is no longer necessary for stockbrokers to physically go to the floor of the exchange to trade securities for their clients or themselves. Trading takes place between the hours of 9:30 a.m. and 1:30 p.m., Mondays to Fridays.

Stock prices are determined by demand and supply. When investors want to buy more stocks than is available for sale, prices tend to increase but fall if the supply is greater than the demand.

Return on investments

Investors buy a stock if they believe they can make a reasonable return on their investment in the future.

The return comes in two forms, dividends and capital gains. Dividends are paid out of the profits of the company and capital gains are made when investors sell for a price that is higher than what they paid for the security.

Investors must, however, be careful to factor in the costs associated with both the purchase and sale of the security.

Investors who buy preference shares on the stock exchange expect to receive a dividend. The rate of the dividend is usually stated at the time the security is issued.

There are several types of preference shares. One of them, the cumulative preference share, provides for dividends not paid in the current year to be paid in future years. Preference shares also increase or decline in value. Among the factors influencing such price movements are changes in the level of interest rates.

The price of listed corporate bonds also responds to changes in interest-rate levels. Interest is usually paid on bonds twice per year.

The stock exchange moved away from using physical documents to settle transactions between buyers and sellers of stock in 1998.

Settlement is done electronically through a book entry system operated by the Jamaica Central Securities Depository, a wholly-owned subsidiary of the JSE.

Apart from the main market, there is a junior market for much smaller companies with a relatively small float of shares trading on the market. Trading in this market has been quite active and investors have made very good returns on some of their investments.

Protecting investors

There are several means by which investors are protected. The board of the JSE sets guidelines and rules for its operation and ensures that the market and member-dealers operate at the highest possible standard.

The Regulatory and Market Oversight Division of the JSE safeguards the integrity of the market by ensuring that listed companies comply with the rules of the exchange, regulating member-dealers, enforcing the rules of the exchange, and by settling disputes.

The Financial Services Commission also regulates the member-dealers of the exchange as well as well as the securities sector.

The JSE Compensation Fund compensates clients of member-dealers who suffer loss due to fraudulent misuse of securities, or document of title to securities, or other assets by the member-dealer, or his directors or employees. It does not compensate for loss due to changes in the value of securities.

The JSE provides a reasonable amount of information on itself and its operations. I suggest you make full use of such information which is available on its website — www.jse.com.jm — or any or all of the following publications: The Jamaica Stock Exchange - A Guide to Jamaica Securities Markets, the JSE Yearbook, and the Jamaica Stock Exchange Pocket Book.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.finviser.jm@gmail.com