An ordinary share in a commercial enterprise (called a common stock in the USA) stands in evidence of a claim by the shareholder of a defined part the enterprise's net assets. Shareholders have the right to receive dividends authorised by the board of directors of the company and paid on dividend dates. Ordinary shares are the last securities to be honoured by a company in repaying liabilities in the event of bankruptcy and are hence the most risky form of investment in a commercial enterprise. Preference shares are ranked above ordinary shares in such circumstances, paying fixed and, except in the case of participating preference shares, limited dividends, irrespective of company profitability. Preference shareholders often lose the voting rights enjoyed by ordinary shareholders as the price for this dividend guarantee. Shareholders may have the right to cast votes on company policy, in which case their shares are said to be 'voting' shares. Shares which do not offer this right to their holders are said to be 'non-voting' shares.
At certain times before a dividend date a share is said to go 'ex-dividend' in which case the purchaser of the share does not have the right to receive the forthcoming dividend. Before the ex-dividend date the price of the share is obviously higher in the market since the buyer does have the right to receive the forthcoming dividend. In this latter case the share is said to trade 'cum-dividend'. The price earnings ratio of a share is the current price of the share divided by the expected earnings (i.e. profits) of the company over the forthcoming year, whilst the dividend yield on a share is the estimated dividend payment over the forthcoming year divided by the current share price.
The various international stock markets usually quote an index number or a variety of index numbers that portray the general level of the share prices in the market at any one time. Such indices are known as 'share indices' and can cover the entire market (e.g. the FTSE All Share Index) or subsections of it (e.g. the Dow Jones 30 stock index, or the FTSE Industrials index). These indices, if based on the current share prices, are sometimes referred to as 'cash market indices', whilst futures exchanges usually offer a future contract on these cash market indices. Such future contracts are known as index futures. Thus we have the FTSE 100 future contract based on the FTSE 100 cash market index. Futures indices are traded for cash settlement (not physical delivery since delivery of an index of shares is probably impossible) and, in many markets, options can be traded on either the cash index or the future index.
In a similar way to that in which dividend yields are calculated on an individual share, analysts often calculate the yield on the whole market or sub-sections of it. There are several ways of compiling index values and of estimating dividend yields and each analyst will have his own preferred index and yield measure.
It should be noted that a source of confusion among new entrants to the financial markets is that United States based traders refer to shares as 'stocks' and bonds as 'bonds'. UK traders usually refer to shares as 'shares' and sometimes to bonds as 'stocks'. Hence the use of the term 'government stocks' in the UK government bond market.
Prior to 1986, the UK equity market had adopted a system in which there was a division between jobbers and brokers. Brokers intermediated the share trading orders of their clients, whilst jobbers made two way markets in a selection of shares. A broker was not allowed to fulfill the function of a jobber and a jobber was not allowed to fulfill the function of a broker. After 1986 this division was abolished and dual capacity firms were allowed to enter the market, making prices in shares and simultaneously acting as brokers in those shares. The companies that entered the business were now larger and stronger than previously in capital terms and a fully automated trading system was formed to cope with the newly arising flows of trading activity. These new players fell into one of the following groupings: a) market-makers, b) broker-dealers, these undertaking own account and client business, who must state which of the two a trade is for at time of dealing, c) brokers engaging in agency business only and d) inter-dealer brokers acting between market-makers only.
A new system called SEAQ (Stock Exchange Automated Quotation system) was developed for the new market environment. SEAQ is a telephone based trading system with automated screen based quotation employed to display prices. Telephones are used to confirm trade details. Trades are quoted in normal market size (NMS). NMS for a share varies according which of twelve bands it belongs to. Larger trades are published on the SEAQ screen after a short time delay, whilst very large trades are published immediately. Trades are confirmed through the SEQUAL system established in 1992, which allows transaction details to be confirmed electronically and replaces fax and telex communications. In 1992, SEATS (Stock Exchange Alternative Trading System) was formed in order to provide a quotation system for less liquid stocks. It gave a single market-maker the responsibility for making a market an individual stock. A paperless settlement system called TAURUS was in process of development by the Stock Exchange but was scrapped in March 1993. It was replaced by CREST in 1994 with progressively shorter rolling trade settlements.