Công cụ tài chính MODULE 4 stock exchange

Chapter 4: Capital Markets (II) Content l Overview of equity securities l How securities are traded l Pricing of company shares l Market price of company shares Characteristics of Company Shares l Shares represents the ownership of a part of a company l Two types of shares: ¡ Common shares (ordinary shares or equities) ¡ Preferred shares Characteristics of Company Shares l Shareholders have the right to vote to elect Board of Directors, to decide on matters of great importance l Shareholders are entitled to share in profits generated by the firm ¡ Firms may pay fixed proportion of their profits as dividends => dividends depend on profitability ¡ Firms may “smooth” the dividend payments by letting them grow steadily over time => dividends finally still depend on profitability l If the firm flourish and grow, value of shares will increase Characteristics of Company Shares l Drawbacks of share ownership ¡ Dividends depend on the firm’s earnings => can vary or even cease if the firm run into long-run difficulty ¡ If the firm goes bankrupt, shareholders will be paid after creditors (owners take risk of operation) If the firm is insolvent, shareholders’ equity = Assets – Liabilities < => shareholders get nothing Bond versus Stock Bonds Stocks Bond owners are creditors Stockholders are owners of the company Creditors generally not have voting rights Stockholders have voting rights Interest payments are often fixed, not dependent on profitability Dividends are dependent on profitability Interest payments is tax deductable Dividends are not tax deductable (from after tax profit) If company cannot pay back debt, The same action is not possible for creditors can push for asset stockholders liquidation or reorganization If the company go bankrupt, bond Equity is a residual claim (paid by owners will be paid first the remaining amount, after paying to all creditors) Preferred Stocks l Preferred stocks: Pay fixed dividends and in that sense are like a bond The dividends, however, may not be paid if the company incurs loss or low profits l Preferred stockholders are owners and their dividends are not tax deductable l Preferred stockholders rank behind bondholders but before common stockholders Preferred Stocks l Cumulative preferred shares: Unpaid dividends are cumulated and become payable when earnings permit l Convertible preferred shares: Carry rights to convert to ordinary shares on specified terms and at specified times Understanding Share Price Data l Information on share price ¡ Newspapers such as Financial Times and Wall Street Journal ¡ Stock exchanges’ websites ¡ Websites of investment banks, financial institutions How company shares are traded l How firms issue securities ¡ Primary market: Initial public offerings (IPO) and seasoned new issues; ¡ Public offering and private placement ¡ Investment bankers and underwriting l Prospectus l Type of underwriting: firm commitment; best - effort Fundamental Analysis l We can use Gordon growth model to get the stock price at any point in time Dt +1 Pt = K−g 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% per year, indefinitely? Assume a 12% expected return What is the price of the stock in years? Fundamental Analysis l The factors affecting share prices are: ¡ Earnings - D1 ¡ Future growth - g ¡ Required return – K - which is affected by the level of risk and general level of interest rates l Events that influence the factors will cause share price to change Required rate of return K = Krf + B ( KM - Krf ) CAPM The market will price an asset such that its rate of return will equal to the risk free rate plus a risk premium which depends upon the market price of risk and the quantity of market risk contained within the asset The factors affecting share prices l  A change in business activity l  A startling new product l  Interest rates l  A profits surprise l  Forecasts of economic boom/recession l  An increase in inflation l  Rumor of conflict amongst managers/directors l  Depreciation of the currency l  A general change in public confidence about the future l  Rumors of a strike l  Competition of industry Event Acts on A change in business activity K, since this is likely to change the riskiness of the firm and thus the return required by shareholders A startling new product G, since profits and dividends are likely to grow more rapidly Interest rates K, since returns on alternative assets will have changed Possibly g too A profits surprise D1, since this is likely to be different from what was expected and possibly also g – depending on the reason for the surprise Forecasts of economic boom/ recession g, since we expect profits and dividends to growth more rapidly/slowly in a boom/ recession An increase in inflation K and maybe g, on the assumption that the central bank is inflation-adverse, this will create expectations of higher interest rates Event Acts on Rumor of conflict amongst managers/ directors K, since the future of the firm is more uncertain (riskier) and investors will want a higher return Depreciation of the currency g, since exporting firms will benefits (g increases) while firms producing for domestic market will face stiffer competition (g reduces) A general change in public confidence about the future K, since this is likely to result in a changed attitude towards risk and risky assets Rumors of a strike If it goes ahead, this is likely to reduce this year’s profits and consequently D1 On the other hand, if it is a response to a management decision to cut costs or increase productivity in future, it may have little effect since there may be a compensating increase in g Fundamental Analysis l Relative valuation models: Stock price are valued by comparing price multiples (P/E – price/ earnings, P/B – price/book value, P/CF – price/ cash flow etc.) of similar assets based on “one price principle” ¡ Assumption: Companies of the same industry usually have similar price multiples ¡ The most popular price multiple is P/E which is telling us what we have to pay in order to obtain a share of a firm’s earnings ¡ A share with high P/E may indicate that it is expensive compare to other shares ¡ However, firms in the same sector with different characteristics may have different price multiples Example l Suppose (P/E) for retailing industry is 23, and the earning per share is projected to be $1.13, what is the value of this share l P= (P/E) x E l  =( 23)x 1.3= $26 l Notice that a higher than average ratio may mean the market expects earning to rise in future; or that the firm’ earning is low risk, paying above average price for it Technical Analysis l Technical analysis (chartism): The explanation of an asset’s value by the study of past price movements and trading volumes l Visual study of recent patterns in the behavior of a share’s price Technical Analysis Technical Analysis Price P2 P1 t0 Time Technical Analysis Technical Analysis Technical Analysis ... 30,2 14. 8 3 ,47 6.5 NASDAQ 2,999 2,579.5 13,618.6 1,826.6 Hong Kong 1,2 54 1,228.5 1 ,45 8.6 92.1 863 1,3 14. 0 2,1 84. 0 1,0 34. 2 1,026 2,083.6 4, 050.9 165.6 855 1,097.0 3,526.2 128.2 2 ,41 4 2,8 84. 4 4, 902.6... -0.32% 17:16:00 +44 .11 +0.30% 18:05:00 +332.31 +0.80% 16:06:27 +273.00 +0.51% 16:17:30 NASDAQ 4, 067.67 Composite Index S&P/TSX 14, 656 .40 Composite Index Mexican Stock Exchange 41 ,803.13 Mexican... Paulo Stock Exchange Index 54, 052. 74 NYSE – Financial Heaven l  1.366 seats l  seat= million USD l  Daily: 1 ,46 billion stocks traded with total market value of $46 ,1 billion l  2,800 stocks