INTRODUCTION

 

A stock exchange, also called a securities exchange or bourse, is a facility which allows for the buying and selling of securities, such as shares, bonds, ETF's, derivatives, commodities, and other financial instruments, through stockbrokers. Put another way, it is a marketplace for the purchase and sale of investment and trading products.

 

There are many stock exchanges around the world. The well-known ones are the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE). The Johannesburg Securities Exchange (JSE), on the corner of Maude Street and Gwen Lane in Sandton, Johannesburg, is the largest stock exchange in Africa and the 17th largest in the world, with a market capitalisation in the billions. Formed on 8th November 1887 by Benjamin Wollan and during the first gold rush, the exchange has been trading securities for over 130 years.

 

The JSE is also a public listed company, appointed in terms of the Securities Services Act to run and administer the equities and bond markets, as well as four derivatives markets in equities, currencies, bonds and commodities. It has approximately 300 shares which are listed and quoted. In the past it has been a consistently profitable entity, mainly because it had a monopoly on the trade in equities in South Africa. During 2017, a number of other stock exchanges were registered and licenced to trade equities in South Africa. So far, the most serious competitor which the JSE has is the A2X which now has a growing number of equities listed including Naspers (the share with the largest market cap on the JSE) and Standard Bank as well as a number of other companies which form part of the Top 40. The A2X claims that its costs of dealing are as much as 50% cheaper than those of the JSE. It will probably take considerable time for the A2X to offer significant competition, but it is gaining ground steadily.

 

If a share cannot meet the listing requirements for an exchange, it still has the option to trade in the over the counter (OTC) market. This is an informal and less regulated venue for shares, which are typically penny stocks. Many blue-chip shares, especially overseas, at one time traded on the over-the-counter market before migrating to an official exchange.

 

HISTORY OF THE JSE

 

In 1887, gold was discovered in the Witwatersrand in Johannesburg. As a result, the JSE was founded on the 8th of November 1887, and officially opened its door in January of 1888 with over 300 mining companies listed. It was just a single-story building on the corner of Commissioner and Simmonds streets in Johannesburg. Soon the building was full, and brokers were forced to trade outside on the street. Because of this abundance in trading activity, the JSE organised for the street to be closed between Market and Commissioner Street, where chains were used to close off the street. All transactions that occurred at that place were termed “between the chains”.

 

The exchange was moved twice between then and 1978, and finally settled in Diagonal Street. From then until 1996, the JSE utilised an open outcry market. This is a market where trades are made by brokers literally shouting out bids and offers. These are then written down on a large chalk board so that everyone can see them and respond. When two brokers agreed on a deal, it was recorded on a piece of paper by each broker. A matched transaction occurred when deals were matched at the close of trade each day, and then the deal was recorded officially. After the deal was matched, settlement took place whereby share certificates of the seller were received by the buyer, and the seller received the payment agreed upon.

 

Transactions were completely computerised in 1996 in what was termed the “big bang”. Computerised transactions involve bids and offers for shares being matched automatically by the JSE computer. And this is the system that we use today. After this the exchange moved to Sandton and it is still there today. Dematerialisation of all shares took place in 2002 and they became part of the Strate settlement system, where all trades are settled T+3 (three days after the transaction occurred). In 2016 trades became settled T+3 instead of T+5. Dematerialisation involves replacing physical share certificates (scrip) with a computerised record of the shares that you own.

 

SO, WHAT DOES THE JSE DO?

 

The JSE is a marketplace. It is a place where people who want to buy shares (and other securities) can meet people who want to sell them – through a stockbroker. A stockbroker’s job is to bring the seller and buyer of a particular share together, using the JSE’s computer system. Originally, buyers and sellers would phone their brokers and tell them how many of what share they want to buy or sell. The broker would then execute the transaction (usually within the next few minutes) by entering it onto the JSE’s computer system. Today, most investors, private investors and institutional, make their trades online through their stockbroker’s trading platform. The JSE computer is continuously searching for those buyers and sellers of any particular share that can agree on a price. As soon as a price suits both the buyer and the seller, the transaction is instantly and automatically completed.

 

The JSE essentially channels funds into the economy and also provides investors with returns on investments in the form of dividends. The primary function of the exchange is to raise capital. It does this by allowing for the inflow of cash resources into the many listed companies on the exchange, which are the driving productive activities within our economy. In this way the functioning of the JSE is very important for the economy as it drives business growth and creates jobs.

 

Another aspect of the JSE is the level of control and security that it ensures, so that shares can be traded without the fear of losing money due to unreliable or corrupt systems. The JSE has made sure that there is absolutely no risk to buyers and sellers of securities, other than that of the normal price risk associated with a smoothly running market. The JSE assumes the counter-party risk, which means that any party who buys or sells an instrument is dealing with the JSE directly and not the counter party. So, in other words, if you are selling shares, you do not have to worry about the buyer not fulfilling their side of the transaction. And since the exchange was dematerialised in 2002 there have been no failed trades as everything is computerised. As well as this, cases of “tainted scrip” (where shares certificates are lost stolen or forged) are no longer an issue. Another security aspect of the JSE is their guarantee against stockbrokers that go bankrupt, as it self-insures the first R5m of any liability and a further R250m thereafter. Your purchases are therefore extremely safe more or less no matter what happens.

 

The JSE is a market in which delivery and settlement of share transactions are done within three trading days, in which time shares are delivered to buyers and funds are transferred to sellers. So, on buying a share on the JSE, you will only receive those shares in three trading days from when you purchase them. Likewise, on selling your shares, it will take three trading days for funds to become available in your stockbroking account. This is termed T+3. On the other hand, a derivatives market entails the delivery at a future specified date at the end of each quarter.

 

JSE DIVISIONS

 

There are two main divisions of the JSE: the main board and the alternative exchange (Alt-X). The main board is the division where the larger and more established companies are listed. The Alt-X, on the other hand, consists of the smaller, start-up and high-growth organisations.

 

THE ALT-X

 

The Alt-X consists of those companies which are medium and small sized, but which are high-growth. While creating a market in which these small companies can raise capital, the JSE is also giving investors the opportunity to access fast growing companies. There are listing requirements for both divisions of the JSE, and as these are less onerous for the Alt-X, companies usually list here first and then progress to the main board once they have become better established. In order for a company to list on the Alt-X:

 

  • It must have R2m in share capital.
  • This is money that the company has raised either in the primary market from shareholders, from company reserves or from the bank.
  • A company must have at least 100 shareholders and a 10% shareholder spread.

 

THE MAIN BOARD

 

The companies on the Main Board vary widely in industry and size, however these companies are well established and make up the majority of the JSE market capitalisation.

 

The Main Board requirements are as follows:

 

  • A company must have at least R25m in share capital,
  • A profit of at least R8m in its most recent year,
  • A pre-tax profit that has been audited for the last three years,
  • And at least 500 shareholders.

 

The JSE has the authority to define these requirements as they see fit, in terms of the Financial Markets Act (19 of 2012) and has a very long document (the JSE Rules) which defines all listing prerequisites in detail. The JSE also has the authority to approve, suspend or terminate a listing.

 

OTHER DIVISIONS

 

There are other divisions on the JSE aside from the Main Board and Alt-X. These are less important to you as a private investor but are none-the-less worth knowing about.

 

  • The Africa Board – This is a division that incorporates African companies that are not in South Africa.
  • Development Capital Market (DCM) – A division that listed small companies that only had R1m share capital, but has been taken over by the Alt-X.
  • Venture Capital Market (VCM) – A division of the JSE that would take companies with even smaller share capitals that the DCM, at R500 000. This has also been taken over by the Alt-X.
  • BEE Board – a division that has shares that can only be bought by BEE compliant investors.


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