Privatization is the conversation of state owned enterprises into private enterprises. It is the transfer of management of enterprises from the public sector to private sector.
Arguments for and against privatization
- As opposed to nationalization, it acts as an incentive to private foreign investors which increase the capital inflow, vital 4 economic growths and development.
- In the long run privatization leads to the expansion of private sector leading to creation of job opportunities.
- It reduces pressure on the government budget i.e revenue which is taken away by government parietals.
- It widens and expands the private sector thus broadening the tax base retimes on which to raise revenue.
- Privatization leads to competition which leads to efficiency of government monopolies.
- The private sector motivated by profits will always be initiative and innovative since profits act as an incentive.
- Under private ownership and management misappropriation, corruption, embezzlement is reduced to a bare minimum if not eliminated.
- Private sectors are not subject to political influence therefore the management is on merit which ensures efficiency.
- It leads to income inequality in society because income will tend to concentrate in the hands of the privileged few who own private enterprises.
- It leads to neglect of some vital sectors of the economy which don’t seem to profitable to the private sector e.g construction of roads, bridges etc.
- It may lead to capital out flow were the enterprises are owned by foreigners. This is called profit repatriation.
- It may be very difficult for the government to efficiently implement some of its policies if the largest percentage of the economy is in the hands of the private sector.
- Private monopolies exploit the public by providing poor quality services and goods yet at high prices.
- Private enterprises don’t have a good bargaining position to obtain loans and financial assistance from financial institutions like IMF, World Bank, EEC as compared to the public sector.
Distinguish between interstate enterprises and multinational enterprises
- Interstate enterprises
They are those owned by two or more countries to undertake certain functions in the interest of the members. The management and financing of such enterprises is also shared in agreeable proportions. Such enterprises include the African Development Bank, the TAZAM Railway, the former East African Railway and harbors.
- Multinational enterprises
They are those whose activities extend across the borders of more than one nation. They have headquarters in one country but operate branches in as many countries as possible. Examples include Oil companies like Esso, Caltex, Vehicles manufacturing companies like Ford with Branches in America, Britain and Japan, soft drinks like Pepsi cola and coca- cola.
Advantages of multinational enterprises
- Market since they operate internationally their market sphere is wider than if they supplied only the local market.
- They help in developing entrepreneur and management skills of the recipient country. This is because they train the local man power.
- They are a source of foreign currency for their home country (country of original) which is needed in international trade to purchase goods not produced at home.
- They have a higher capacity to attract investors than local enterprises because of the good will and reputation they may have.
- Since they earn high profits, they can afford to carry out research which generally improves on the quality of goods and services.
- They are a source of employment opportunities to the local people in the countries where they operate.
- They realize more profits than local enterprises serving only the local population. Secondly losses made in one country can be covered by profits made in another country.
- Their operational costs and expenses are spread which makes them lower than those of local enterprise.
- They act as a source of capital inflow for the recipient country. This bridges the savings gap esp. in developing countries.
- They promote the interest of their home countries neglecting and ignoring the interest of the countries where they operate.
- Because they are politically and economically very strong they are in position to influence the politics of the resident country.
- They are monopolists in nature which makes them charge high prices and offer small salaries to their local population and employees respectively.
- They are strong financially which gives them an advantage over local firms in terms of competition. They therefore discourage similar local undertaking from developing.
- The withdrawal of their services may lead to untold problems more so if they provide.
What is stock exchange market?
This is a highly organized market for buying and selling stocks and shares.
A share is a unit of a company’s capital.
A company’s share capital (authorized or nominal) is made up of shares contributed by various share holders who expect to earn dividend when the company earns profits.
Stocks on the other hand are a collection of shares.
When individuals buy shares from a company e.g new vision and Stanbic banks, after a specified time, the company can buy back those shares i.e by converting the share back to physical cash. These are called redeemable shares.
There are shares which a company cannot buy back from share holders such shares are transferred from one individual to another through a stock exchange market. These are referred to as irredeemable shares.
THIS VIDEO EXPLAINS MORE ABOUT THE STOCK EXCHANGE
Functions of a stock exchange market
- It bridges the gap that links buyers and sellers of stocks and shares together.
- This facility enables shares to easily be converted into cash and it encourages investment to be carried out.
- It guides investors and interested business people about the performance of various companies. This is because in a stock market, companies are advertised to make their shares attractive and in the process useful information about the performance of various companies is exposed.
- The stock exchange market gives each company a listed stock exchange index. This is a yard stick for the economic performance of the country.
- It sets prices for shares and securities regardless of the period when they are bought or sold. It also deals in government bonds and securities.
- A stock exchange market assures the public about investments they have made about in these companies by buying shares in those companies. This is achieved when stock market study and observe the financial state of every company that sells shares. If a company is not performing well, it is eliminated from the membership list to protect the public.
- It is a medium through which transfer of shares and securities between investor is conveniently facilitated.
GENERAL TERMS USED
- Par value of shares
This refers to the face value of a share which is written or the face of the share. When all the par value of shares is added, we get the total of the share capital of a company. When a company is liquidated, the share holders are responsible for the company’s liabilities up to the par value of their share.
- Market value of share
This is the price of the share which is quoted at the stock exchange market. It is a flexible price depending on the following;
- Reputation of the company
- Level of profit and losses
- The demand and supply of shares
If the above conditions are favorable then the price of the share will be high. If the conditions are unfavorable then the price will even be lower than the par value of shares.
This is the payment given to the share holders out of a company’s profits. This basically depends on the type of shares each share holder has.
- Bonus shares
This is when undistributed profits are kept as reserves and later converted into permanent share capital. The ‘would be’ dividend and are not distributed to share holders but are converted to extra companies shares therefore increasing share capital of the company. This is technically referred to as capitalization of reserves and in the long run these shares will be given to the shareholders there by increasing the number of shares held by each member.
- To go public
This means obtaining the right to sell shares to the public. Sometimes private limited companies would wish to expand capital by inviting the public to subscribe to their shares.
- Quoted companies
These are companies which are listed on the stock market. After being listed on the stock market, such accompany shares can be sold and bought in a stock market. It is a stock exchange council that approves companies whose share can be dealt in by the stock exchange market.
- Unquoted companies
These are companies whose shares cannot be bought or sold in a stock exchange market all private company fall under this category and public limited companies which have opted not to acquire a stock exchange quotation. To obtain a quotation from a stock exchange, a company applies to the stock exchange council for approval.
- Issuing houses
These are financial institutions that specialize in issuing new shares to the public on behalf of public limited companies e.g stock exchange market and capital markets.
Types of securities sold in a stock exchange market
Stock is a collection of shares from different business entities. When individuals form a company, they combine shares and form a joint stock companies. Stock might be of different types e.g government stock, co-operative stock etc.
- Bearer security
These are securities that are transferable by mere delivery without a transfer from being made. The issuing company does not register the transfer.
These are loans issued by the government or state co-operations and they have fixed rate of interest.
- Blue chips securities
These are shares in companies which have a high sound reputation in their history. Such companies are not even likely to be affected by temporary trade recessions or depressions.
- Gilt edged securities
They carry a minimum risk regarding the regular payment of interests.
- Portfolio securities
This is a number of securities held by an investor. These securities are diversified from a number of companies to reduce the number of losses.
Types of middle men in stock exchange markets
These are middle men who buy and sell shares on behalf of others. They are approached by those who wish to buy and sell shares and give advise on the different types of shares. On the other hand, when they sell shares, they find the best price possible for the shares. Brokers must buy and sell shares through Jobbers.
Are middlemen who buy and sell share on their own behalf. They normally buy shares when they are cheap and sell them when the price goes up.
Jobbers do not deal directly with the public but go thru stock brokers. This prevents them from exploiting the public.
Jobbers may be specialized in a particular type of stock for example manufacturing, mining, transport and so on. There are 3 types of jobbers ie;
This type of jobbers sells shares when the prices are high with anticipation that prices will soon fall. These jobbers soon buy the shares back when these prices drop marketing big profit margins.
These buy shares when the prices are law in anticipation that prices will rise. They soon sell their shares when the prices rise makes big profits.
NB: while bears deal with public shares, bulls deal with government shares.
These specifically deal in new shares and they buy shares when the price is cheap in anticipation that the price will rise then they sell the shares at high price making a big profit.