Issues related with central government - Stock Exchange (part two)

(b) Explain the role of the stock exchange and the factors which determine the price of shares.

The Stock Exchange provide a market platform for buying shares.

The Stock Exchange acts on two levels, as a primary market, the Stock Exchange will liaise with investment banks and businesses that are looking to raise capital by selling shares. This process involves the business being 'listed' on the Stock Exchange or 'floating'.

However, much of the Stock Exchange's work is as a secondary market. People buying shares may wish to do so for a variety of reasons - to secure dividends or to see the price of the shares rise, for example.

To facilitate this process the market has two main 'players' - stock brokers and market makers.

Stockbrokers act on behalf of clients, buy and sell shares on their behalf and generally belong to firms who are members of the Stock Exchange.

Market makers simply buy and sell shares on their own account but make their money on the difference between the price they pay for buying shares and what they sell them for. This difference is called the 'spread'.

The London Stock Exchange is one of the oldest exchanges in the world, and also one of the most prestigious, supplying high-quality prices, news and other information to the financial community, not just in the UK but across the world.

Many factors determine the price of shares, for example, news, positive news about a company can increase buying interest in the market while a negative press release can ruin the prospect of a stock.

Demand and supply concept, when more people are buying a certain stock, the price of that stock increases and when more people are selling he stock, the price of that particular stock falls.

Earning Per Share - It is mandatory for every public company to publish the quarterly report that states the earning per share of the company on the last quarter. This is perhaps the most important factor for deciding the health of any company and they influence the buying tendency.

For example, since April 20, BP's share price has fallen over 34% because of the oil spill, including a huge 13% fall early this week.

BP is a major component of the FTSE 100 index - it currently comprise 6.1% of the value of basket of shares that make up the index.