Research Journal of Finance and Accounting www.iiste.org ISSN 2222-1697 (Paper) ISSN 2222-2847 (Online) Vol.5, No.10, 2014 107 The Relationship of the Stock Market Prices on Exchange Rate and Market Capitalisation: the Case Dar es Salaam Stock Exchange in Tanzania Iddi. Salum Haji* Wei Jianguo School of Economics, Wuhan University of Technology, Wuhan 430070 China * E-mail of the corresponding author: iddisalum2001@yahoo.com Abstract This paper investigated the relationship between the Dar es Salaam Stock Exchange All Shares Index (DSEI), Exchange rate (EX) and Market capitalisation (MC) using monthly data from July 2009 to December 2013 obtained from quarterly Updates and website of Dar es Salaam Stock Exchange. The regression and correlation techniques were used to establish the relationship. The dependent variable was the Dar es Salaam Stock Exchange All Shares Index while Exchange rate and Market capitalisation, were independent variables of regression. The results show that the Exchange rate and the Dar es Salaam Stock Exchange All Shares Index have positive regression coefficient, Market capitalisation and Dar es Salaam Stock Exchange All Shares Index also have positive regression coefficient. Also these three variables were found to have positive correlation coefficients. From these results obtained, we suggested that there is strong positive linear relationship between Market capitalisation and Dar es Salaam Stock Exchange All Shares Index, and moderate positive relationship between Exchange rate and the Dar es Salaam Stock Exchange All Shares Index. Keywords: Dar es Salaam Stock Exchange, Market capitalisation, exchange rate, relationship, regression 1. Introduction The Capital markets are facilities and interactions through which funds move from fund holders to productive users. The market channels funds at the market price, to productive activities. The Capital market is classified into two segments. These segments are primary and secondary markets (DSE, 2010, Bodie et al., 2009). In Primary markets securities are issues to initial buyers at the first time-Initial Public Offering (IPO). Initial Public Offering is used when the firms floats shares or its corporate bonds to the investors for the first time. Those companies wishing to raise fund for expanding their capital and increase their business activities can issue their shares for the first time through the IPO. The securities initially issued at the primary markets, are later traded in the secondary markets (Bodie et al., 2009). The secondary markets bring the interaction of buyers and sellers of the securities previously issued to and subscribed by investors in primary markets. The secondary markets are administered by formal institutions given the mandate of trading securities. Some examples of the secondary markets include, New York Stock Exchange (NYSE), Tokyo Stock Exchange (TSE) and the Dar es Salaam Stock Exchange (DSE).The secondary market facilitates the process of buying and selling securities initially sold at the primary market to investor (Bodie et al., 2009). Before 1990s, Tanzania was following centralized economic policies, all economic activities at that time were only driven by the government, there were very few or no opportunities for the private sector to participate in the economy. Since the economy was centralised the public had no idea of the opportunities available in the capital market. By that time the economy of Tanzania was dependent on almost 700 poorly performing government’s corporations (CMSA, 2006). In 1990s the Tanzanian government established economic reforms. The reforms were targeted to improve the access of financial services to all sectors that were previously excluded by financial providers. The financial sector reforms introduced were, liberalization of interest rates, eliminating administrative credit allocation and strengthening the role of the Bank of Tanzania in regulating and supervising financial institutions (Simpasa, 2011). The reforms were also aimed on restructuring the state owned financial institutions and allow entry to new private financial institutions in the market. During the reforms Tanzania had privatized more than 300 government organizations, also had observed the growth of financial Institutions, the increased participation of public in investment activities , the establishment of the Capital Market and Security Authority (CMSA) and the establishment of the Dar es Salaam Stock Exchange (DSE). 2. Dar es Salaam Stock Exchange (DSE) The Dar es Salaam Stock Exchange (DSE) is the only formal trading place for securities in Tanzania. The DSE was established in 1996 under the Companies Ordinance (Cap. 212). It is a private company limited by guarantee with no share capital. It is a non-profit making body established to facilitate the Government implementation of the economic reforms and share ownership of all privatized companies in Tanzania. The exchange is registered