London, for a long time in history, has been the centre of world trade and commerce. Even during medieval times, it had attracted traders and artisans from all over the world who wished to expand their business beyond their territorial boundaries. Its attractiveness as a centre of global finance and enterprise has never diminished and has kept on growing over the ages. In the modern era also when new centres of business and trade were established firmly in other parts of the world, the city still remained a favourite and among the top destinations for companies trying to raise finance and establish themselves.
The London Stock Exchange is one of the most prominent exchanges of the world; it hosts companies from not only the United Kingdom but also a large number of foreign and multinational companies. The city not only gives the opportunity of national and international companies to raise capital but also offers small investors the opportunity to invest in the global economy via investments in stocks of international and multinational companies. It is because of this reason that this stock exchange is more stable compared to other stock exchanges where they have only domestic companies that are listed or a very few foreign or multinational companies. The higher the proportion of these companies in an exchange, the higher is the propensity for the unsystematic or specific risks facing an exchange to be diversified away. The fortunes of the exchange do not need to be subjected to the vagaries of economic uncertainties of a particular country.
The London Stock Exchange is divided into two segments; one is the Main Market segment and other the Alternative Investment Market (AIM) segment. The main market segment is utilized for listing of established companies and the Alternative Investment Market (AIM) segment for start-ups and companies with new and innovative ideas and ones that belong to sunrise sectors.
London Stock Exchange Group Plc owns the London Stock Exchange. This is a listed entity on the London Stock Exchange itself. As on 13 November 2019, before market close, the stocks of the group were quoted at GBX 6,934.00 per share with a market capitalization of £24.34 billion and earnings per share of £1.36 in the trailing twelve months period. It offered its investors a dividend of GBX 63.30 per share in the prior 12-month period.
There are a number of Stock Indices existing at the London Stock Exchange. The most prominent of them being the FTSE 100, FTSE 250, FTSE All-Share, and FTSE AIM All-share indices maintained by the FTSE Russell Company. All companies and intermediaries on the exchange must abide by its rule and regulations, and their conduct is overseen by the Financial Conduct Authority (FCA), a statutory body constituted under the Crown for this purpose.
How to be an investor on this exchange
The extensive global reach, depth and access to top-notch global companies provided by the London Stock Exchange make it a very attractive place for prospective investors. The investors may, however, find it a little more complicated though to operate in this market compared to stock markets of other countries. There are certain aspects that the investors should know before they start to trade on this exchange.
For a British domestic investor, the process is not so different as for investors of any other country to trade in their local stock exchanges. The problem arises if you are a foreign investor. The London Stock Exchange allows international investors to invest in stocks in this market, via an intermediary that has been registered with it. The prospective investor must deposit a certain sum of money with the intermediary and open an account, and the deposit may be made in US Dollar or in British Pound Sterling. It is to be remembered that the London Stock Exchange allows for trading in multiple currencies as many of its constituent companies are foreign companies. For Foreign investors, however, the investments have to be made in either GDR (Global Depository receipt) or ADR (American Depository Receipt) which would be representative of the individual stocks of companies that the investor is interested in investing. However, one has to be mindful that not all stocks are available in ADR’s and GDR’s in which case the investor may choose the route of CFD’s or Contract for Difference derivative instruments.
For the investors of United States however, the process of investing in the London Stock Exchange may be a little more difficult on account of the strict US regulations on funds transfer to foreign countries and the rules of the United States Securities and Exchange Commission (SEC) on foreign financial intermediaries operating in the United States and soliciting funds to invest abroad. For investors of other countries however the process is not very complicated, and the chosen financial intermediary usually takes care of any regulatory requirements that may need to be adhered to on behalf of the investor. However, on the cost front it would undoubtedly be more expensive to trade on a foreign exchange than trading on a domestic exchange. Hence it may be suited only for the sophisticated and institutional investors to take positions on the London Stock Exchange as they alone will be able to buy in the desired volumes that will even out the trading and brokerage costs.
It is thus a little more challenging to be an investor in the London Stock Exchange if you are a foreign investor and especially if you are a small investor with limited resources at your disposal. The domestic British investors, however, both institutional and individual face similar set of regulatory hurdles as may be faced in stock trading in any other country while enjoying the benefits of investing in an international stock exchange.
However, the case for foreign institutional investors is different; for them, the regulatory hurdles are a more significant challenge than the costs, and London Stock Exchange being an International Stock Exchange has regulations that are lucid and more friendly in comparison to many emerging market stock exchanges. From the above discussion, it can be concluded that the London Stock Exchange is welcoming for a Foreign Institutional Investor but not for small, unsophisticated foreign investors who want to try their luck at the exchange.
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