Lec 4 - Stock exchange.pdf

7/21/2019 Lec 4 - Stock exchange.pdf

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Stock Markets



Content

• Overview of equity securities

• How securities are traded

• Pricing of company shares

• Market price of company shares



!"#$%&' )*%+,)

• Issuers:

• Joint Stock Company

• Characteristics of stock

• Return, risk & liquidity

• Entitle the holder to ownership of the company

•

No maturity

•

No limit on the amount of dividends that can be paid

•

Dividend amount per share is determined by thecompany’s board of directors and must be approved by

the shareholders

•

Residual claim & limited liability

3



!-%))./.,0 !"#$%&' )*%+,)

Common stocks

also known as

equity securities or

equities, or ordinaryshares, represent

ownership shares in

a corporation

According tothe interests of

shareholders

Preferred stocks

has features similar

to both equity and

debt

4



"#$$#% &'#()&

• Claim on income:

•

have right to the company’s residual income (net profit) after debt –holders and preference shareholders have been paid

• Claim on assets:

•

Have a residual claim on the company’s assets in the case of itsliquidation

• Voting rights

•

Elect the company’s board of the directors

•

Vote on resolutions at company general meetings

•

Approve any change on the constitution and the renounceable rules ofthe company

• Pre-emptive rights

• Avoiding dilution effect

5



*+,- ./01- #2 (#$$#% &'#()

6

!"##"$&'"()

*+(,-+./,

0"")-+./,

1+2),'-+./,

3$'24$&4(-+./,



Equity as a source of finance

• Advantages

•

Dividends are discretionary

•

No maturity date

•

Increases financial base and borrowing capacity

• Disadvantages

•

Issuing more shares can change the ownership and control of the

firm

•

No tax shield•

Costs associated with equity issues greater than for debt issues



34-2-44-5 &'#()&

•

A form of equity financing with

characteristics of debt securities

•

Normally have no voting rights• Normally entitled to receive a specified fixed

return out of the firm’s net earnings

•

Rank ahead of ordinary shares with respect todividend payments and claims on assets in

the event of liquidation



6#4$& #2 ,4-2-4-%(- &7/4-&

• Cumulative or non-cumulative

• Usually cumulative

•

Redeemable or non-redeemable

•

Usually non-redeemable

•

Participating or non-participating

•

Usually non-participating



34-2-4-%(- &7/4-&

Advantages

• No default risk with non- payment of dividends

•

Dividends limited

•

No ownership dilution• Possible tax relief with

franked dividends

•

Leverage effect on EPS

Disadvantages

•

Preference dividends arenot tax deductible – notax relief for firms in

categories 2 and 3•

While failing to paydividends cannot force acompany intoliquidation, it conveys a

negative signal to themarket



Non-debt sources of long-term capital

• Equity financing

•

Preference shares

???

B d S k



Bond versus StockBonds Stocks

Bond owners are creditors Stockholders are owners of the

company

Creditors generally do not havevoting rights

Stockholders have voting rights

Interest payments are often fixed,

not dependent on profitability

Dividends are dependent on

profitabilityInterest payments is taxdeductable

Dividends are not tax deductable(from after tax profit)

If company cannot pay back debt,

creditors can push for assetliquidation or reorganization

The same action is not possible for

stockholders

If the company go bankrupt, bondowners will be paid first

Equity is a residual claim (paid bythe remaining amount, after payingto all creditors)



Understanding Share Price Data

2009

Telecommunications Price Change High Low Yield P/E Vol.000s

Cable and Wireless 142 -0.50 170 125.1 6.2 22 21,246

(1)

Name of the firm

(2)

Latest price (in pence). In newspapers, this is previous day’s price

(3) Price change from the previous day’s close price

(4)

Highest price so far during the year

(5) Lowest price so far during the year

(6) Dividend yield = Latest dividend/Current price

(7) P/E = Price/EPS

(8)

Trading volume



Coca Cola Stock



8'#() $/4)-' 9%5-:

• A measurement of the value of a section of

the stock market.

• It is computed from the prices of

selected stocks (typically a weighted average).•

It is a tool used by investors and financial managers

to describe the market, and to compare the return

on specific investments.

•

Vn-index; Dow-Jones; Shenghai index,…



ISSUING OPERATIONS

"#$%&'( )*(#$+,

"-./$0 )*(#$+,

•

Definition• Conditions

• Procedures



(1) PRIVATE OFFERING

!

Any offer of securities or invitation to a selected group of persons by a

company (other than by way of public offer) through issue of a private

placement offer letter and which satisfies the conditions

!

An offering of securities that is exempt from registration with state or

federal regulation agencies.

!

Typically, made to a small group of investors.

! Professional investors

!

Less 100 non-professional investors



Public offering

• The offering of securities of a company or a similar corporation to the

public

•

Offer for more than 100 investors, exclude professional investors

• Generally, the securities are to be listed on a stock exchange

• A public offering requires the issuing company to publish

a prospectus detailing the terms and rights attached to the offered security,as well as information on the company itself and its finances.

•

Many other regulatory requirements surround any public offering and theyvary according to jurisdiction.

IPO-Initial Public Offerings Secondary Offerings

Article 10 - Decree 58/2012



Stock Conditions•

Article 12 – Securities law•

Article 7- Securities law amended

Capital Charter capital ! 10 billion VN"

Performances 3'& 5/&4$,&& "6,2+7"$ 4$ '8, 9,+2 62,(,:4$; '8, 9,+2 "< "=,24$;

2,;4&'2+7"$ 4& 62">'+5., +$:? +' '8, &+#, 7#,? 4' 8+& $" +((2/,:

."&& /6 '" '8, 9,+2 "< "=,24$; 2,;4&'2+7"$@

Others 3'& 4&&/+$(, 6.+$ +$: 6.+$ "$ '8, /&, "< (+64'+. ;,$,2+',: <2"# '8,

&+., "=,24$; +2, +:"6',: 59 '8, A8+2,8".:,2&B C,$,2+. D&&,#5.9E



Stock Procedures

-

Article 14.- A dossier of registration of public offering of stockscomprises:

a/ A written registration of public offering of stocks;

b/ A prospectus;c/ The issuing organization's charter;

d/ The decision of the shareholders' general assembly adoptingthe issuance plan and the plan on use of capital generated from

the public offering of stocks;e/ An issuance underwriting commitment (if any).



34#&,-('1&

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:F P'8,2 4$<"2#+7"$ &6,(4>,: 4$ '8, #":,. 62"&6,('/&E



How company shares are traded

• Where securities are traded(Secondary market)

• National and local securitiesexchanges

• Over-the counter market



Trading on exchange

23

!"##"$% '(")*%+,-

%./$"%

0$'1"$%!2'31

4)3./,-"5

678

0$'1"$%09:"$% '(")*%+,-

%./$"%

- Individuals-

Institutions-

Rest of world-

Individuals- Institutions

- Rest of world



NYSE – Financial Heaven• 1.366 seats

• 1 seat= 3 million USD

• Daily: 1,46 billion stocks tradedwith total market value of $46,1

billion

• 2,800 stocks are listed with total

market value of $20,000 billion

• The third largest exchange in the

world• NYSE is where the "American

dream" was completed and

buried most pressing

24



Trading on OTC

25

OTC

Agreement

Quotation

Marketmakers



(1) Agreement transaction

26

Buyers SellersAgreement

Buyer s brokerage firm Seller s brokerage firm

Settlement system

Transaction system

Confirm thetransaction

Receiveorders

Confirm theexecution

Confirm theexecution



(2) Quoted transaction

27

Investor

A

Brokerage

firm A

InvestorB

Brokeragefirm B

Transaction

system

Confirm

thetransaction

Inform the

results

Buying order

Inform the

execution

Buying order

Inform the

execution

selling order

Inform the

execution

selling order



(3) Market – maker transaction

28

Investor A

Marketmaker A

Brokerage firm

A

Market

maker C

Marketmaker B

OTC

central

system

quotation

quotation

quotation

confirmation Inform the

result

orders

orders

Confirm the

transaction

Report the

execution



Pricing of Company Shares

•

Fundamental analysis: The explanation of an asset’svalue by reference to its potential earnings and risk

• Technical analysis: The explanation of an asset’s valueby the study of past price movements



Fundamental Analysis

Fundamental theory of valuation:

The value today of any financial

asset equals the present value ofall of its future cash flows, suitablydiscounted.

Suitably discounted: Take intoaccount both general level ofinterest rates and risk




Cash flows – You buy a stock at price P0 andplan to sell it in 1 year. You predict that youcan sell it for price P1 and receive a dividend

of D1 at the end of the year. Discount futurecash flows P1 and D1 to calculate currentstock value (price):

K

P D

P +

+

=

1

11

0

K: Discount rate




Cash flows – If the investor plans to hold thestock for H periods, receive a series ofdividend D1, D2,! DH and sell it after H

periods for price PH.

H

H H

K

P D

K

D

K

D P

)1(....

)1(1 2

210

+

+

++

+

+

+

=




Example

Current forecasts are for XYZ Company to pay dividends of $3, $3.24, and $3.50 over

the next three years, respectively. At the endof three years you anticipate selling yourstock at a market price of $94.48. What isthe price of the stock given a 12% expected

return?




Example

Current forecasts are for XYZ Company to pay dividends of $3,$3.24, and $3.50 over the next three years, respectively. Atthe end of three years you anticipate selling your stock at amarket price of $94.48. What is the price of the stock given a12% expected return?

PV

PV

=

+

+

+

+

+

+

=

3 00

1 12

3 24

1 12

3 50 94 48

1 1200

1 2 3

.

( . )

.

( . )

. .

( . )$75.




Cash flows – If the investor plans to hold thestock forever, he will receive a series ofdividend D1, D2, D3!..=> Discounted

Dividend Model (DDM)

....)1()1(1 3

3

2

210 +

+

+

+

+

+

=

K

D

K

D

K

D P




If we forecast no growth of dividends (D1 =D2 = D3 =!), and plan to hold out stockindefinitely, we will then value the stock as a

PERPETUITY.

K

EPS

K

D P Perpetuity ===

1

0

Assume all earnings arepaid to shareholders




•

Cooper, Inc. common stock currently pays a $1.00dividend, which is expected to remain constant forever. Ifthe required return on Cooper stock is 10%, what shouldthe stock sell for today? Given no change in the

variables, what will the stock be worth in one year?




•

P0 = $1/0.10 = $10

• One year from now, the value of the stock,P1, must be equal to the present value of allremaining future dividends.

Since the dividend is constant, D2 = D1 , and

P1 = D2/K = $1/0.10 = $10.

In other words, in the absence of any

changes in expected cash flows (and given aconstant discount rate), the price of a no-growth stock will never change.




Constant Growth DDM - A version of the dividendgrowth model in which dividends grow at aconstant rate forever (Gordon Growth Model).

g K

D

P !

=

1

0

g: constant growth rate of dividends

Given any combination of variables in theequation, you can solve for the unknown variable




•

We can use Gordon growth model to get the stock price atany point in time

g K D P t

t !

= +1

Notice that Pt = P0 x (1+g)t




Example

What is the value of a stock that expects to pay a $3.00 dividend next year, and then

increase the dividend at a rate of 8% peryear, indefinitely? Assume a 12% expectedreturn. What is the price of the stock in 5years?




00.75$08.12.

00.3$1

0 =

!

=

!

=

g K

D P

2.110$08.12.

408.4$6

5

=

!

=

!

=

g K

D P

408.4)08.01(3)1.( 55

16 =+=+= x g D D

P5 = P0.(1+g)5 = 75 x 1.085 = 110.2




Ex: Suppose a stock has just paid a $5 per share dividend.The dividend is projected to grow at 5% per yearindefinitely. If the required return is 9%, then what is thestock price today?



Valuing Common Stocks

P0 = D1/(K - g )

= $5 ! ( 1.05 )/( 0.09 - 0.05 )

= $5.25/.04

= $131.25 per share




Example- continued

If the same stock is selling for $100 in thestock market, what might the market be

assuming about the growth in dividends?

$100 $3.

..

=

!

=

00

1209

g

g

Answer

The market is

assuming the dividend

will grow at 9% per

year, indefinitely.




Ex: Suppose a stock has just paid a $5 per share dividend.The dividend is projected to grow at 5% per yearindefinitely. If the stock sells today for $65.625, what isthe required return?




P0 = D1/(K - g )

(K - g ) = D1/P0

K = D1/P0 + g

= $5.25/$65.625 + .05= 0.13 = 13%




•

P3 = D4/(K – g) = D3 x (1 + g)/(K – g) = 52.50

88.43)1.01(

5.52

)1.01(

5.2

)1.01(

2

1.01

1

)1()1()1(1

332

3

3

3

3

2

21

0

=

+

+

+

+

+

+

+

=

++

++

++

+=

K

P

K

D

K

D

K

D

P




•

If the dividend grows at constant rate after t periods, then the price can be written as:

t

t t

K

P D

K

D

K

D P )1(

....)1(1 2

210

+

+++

+

+

+

=

g K

D

P t

t !

=

+1




•

The factors affecting share prices are:

• Earnings – D1

Payout Ratio (p) - Fraction of earnings paid out as dividends

Plowback (Retention) Ratio (q) - Fraction of earnings retained by the firm.

•

Future growth – g = q x ROE•

Required return – K - which is affected by the level of riskand general level of interest rates

• Events that influence the factors will cause share price tochange



Capital Asset Pricing Model

K = Krf + B ( KM - Krf )

CAPMThe market will price an asset such that its rate of return will equalto the risk free rate plus a risk premium which depends upon themarket price of risk and the quantity of market risk containedwithin the asset




•

Ex: Thornbury has a beta coefficient of 0.9. The risk freerate of interest rate is 3% while the return on the wholemarket portfolio is 14%. What is required rate of return onThornbury’s stock? What is the price of Thornbury’s

share if its last dividend is 6p per share and earningshave been growing steadily at 10% pa?




•

KT = 0.03 + 0.9 (0.14 – 0.03) = 0.129

28.21.0129.0)1.1(06.0 =

!

=T

P



61%5/$-%'/0 /%/0+&9&

•

A change in business activity

•

A startling new product

•

Interest rates

•

A profits surprise

•

Forecasts of economic boom/recession•

An increase in inflation

•

Rumor of conflict amongst managers/directors

•

Depreciation of the currency

•

A general change in public confidence about the future

• Rumors of a strike

Event Acts on



A change inbusiness activity

K, since this is likely to change the riskinessof the firm and thus the return required byshareholders

A startling newproduct

G, since profits and dividends are likely togrow more rapidly

Interest rates K, since returns on alternative assets willhave changed. Possibly g too

A profits surprise D1, since this is likely to be different fromwhat was expected and possibly also g –depending on the reason for the surprise

Forecasts ofeconomic boom/recession

g, since we expect profits and dividends togrowth more rapidly/slowly in a boom/recession

An increase ininflation

K and maybe g, on the assumption that thecentral bank is inflation-adverse, this will

create expectations of higher interest rates

E A



Event Acts on

Rumor of conflictamongst managers/

directors

K, since the future of the firm is more uncertain(riskier) and investors will want a higher return

Depreciation of thecurrency

g, since exporting firms will benefits (g increases)while firms producing for domestic market willface stiffer competition (g reduces)

A general change inpublic confidenceabout the future

K, since this is likely to result in a changedattitude towards risk and risky assets

Rumors of a strike If it goes ahead, this is likely to reduce thisyear ’s profits and consequently D1. On the other

hand, if it is a response to a managementdecision to cut costs or increase productivity infuture, it may have little effect since there may bea compensating increase in g



Technical Analysis

•

Technical analysis (chartism): The explanation of anasset’s value by the study of past price movements andtrading volumes

• Visual study of recent patterns in the behavior of a

share’

s price

T h i l A l i



Technical Analysis

Technical Analysis



Technical Analysis• A simple moving average (SMA): is the unweighted

mean of the previous n data points

•

An example of a simple unweighted running mean fora 10-day sample of closing price is the mean of theprevious 10 days' closing prices. If those prices arep

M

, pM-1

!.pM-9

then the formula is•

• When calculating successive values, a new value

comes into the sum and an old value drops out,meaning a full summation each time is unnecessaryfor this simple case,



Technical AnalysisP2

P1

Time

Price

t0



Technical Analysis

•

Support level – P1: The price range at which thetechnician would expect a substantial increase in thedemand and price of the stock. In other words, stockprice reaches the lowest point and begins to recover.

• Investors will be ready to buy as soon as the price

approaches P1, especially those interested in capitalgrowth



Technical Analysis

•

Resistance level – P2: The price range at which thetechnician would expect an increase in the supply of thestock and a price reversal.

• If the price rises above P2, investors should be ready to

sell the moment that the price starts to fall back

Technical Analysis



Technical Analysis

Technical Analysis



Technical Analysis

Lec 4 - Stock exchange.pdf

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