Question

3. (a) Discuss the secondary market role of a stock exchange and its importance to the corporation. Illustrate your answer by using examples.

(b) What is meant by the liquidity of the share market? Explain why liquidity in the secondary market is important both to shareholders and to the corporation.

Answer 1

The secondary market act as a mediator between company and its shareholder's as it provides liquidity to the shareholder and also reflect the market value of the company.It is very much important to a corporation as value of it's shares in the market can be known at any time and it also reflects fulfillment of corporate governance obligation of the organisation.For example the market price of company is generally the ability of the company to earn n times more than it's present earnings.So company uses to show their market price as Earning per share multiply by it's price earning ratio.

Liquidity of a share market means it's ablity to generate cash and its market value at any time.It is important to shareholder as they can sell their shares as when they want and realise their money and it is important to company as it shows it ability to earn and thus increases it's Marketability.

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