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Unformatted text preview: Chapter 8 Chapter 8 The Stock Market Information:
Evolution of the Stock Market
• 17th century
• To form jointstock companies to undertake risky trading ventures. Stock Exchanges and Future Markets
Board to Boardless Stock Exchange
24hour world stock market 8.1 ELEMENTS OF THE STOCK 8.1 ELEMENTS OF THE STOCK MARKET
• Security – a piece of paper in which an organization, either business or government, acknowledge a financial obligation. • Bond – securities issued to the lenders with large numbers sums of money by some organization, such as the government. • Security Market – where the holders of securities can buy and sell Stock’s Category
• Definition – the shares in proportion to contribution to the company with vote. • Ordinary shares – where the shareholders bear the ultimate risk of loss should the company fail, they have no preferential right to the return of their funds. • Preference shares – the shareholders have fixed payment (not fluctuating with the good or bad performance of the company), and have a preference over the ordinary shareholders.
– when liquidation, the shareholders have preference with regard to repayment of capital. – without votes, the shareholders cannot take part in the operation of the company • Comparison – preference shares is less risky than ordinary shares, with limited participation in the profit and decision making. Stock’s Value
• Par value – the amount price recorded on the shares. • Market value
– Issue price • what shareholders pay when the shares are first offered to investors. – Exchange price • A.B.H.N.S.
• Blue chip
• Red chip 8.2 THE ROLE OF THE 8.2 THE ROLE OF THE AUSTRALIAN STOCK EXCHANGE • Stock Exchange offers several import benefits:
– Liquidity • shareholders can generally convert their shares to cash at short notice in the ongoing market. – Valuation • value one’s holdings of shares almost on a second by second basis. – Protection • ensure a high standard of business behavior on the part of the management of listed companies. • Secondary Market (circulating market) – where the issued shares can be conveyed. • Primary Market (new issue market) – which raises the new longterm debt (borrowing) and equity (ordinary share capital) issued by both business and government. 8.3 HOW THE ASX WORKS
8.3 HOW THE ASX WORKS
• Stockbroking firm – instruction of which shares, numbers, price • Past – facetoface system of a board on the wall of the trading floor • SEATS – Stock Exchange Automated Trading System – computer network linking stockbrokers’ offices
– stockbrokers enter buy and sell orders into the system, monitor the market from moment to moment. • a specific market – a network of screen 8.3.2 Share Transfer – “CHESS”
8.3.2 Share Transfer – “CHESS”
• Past – the seller required to surrender the share certificate to the broker for submission to the company’s share transfer secretary, who would then issue a new document to the buyer. • CHESS – Clearing House Electronic Subregister System
– it keeps a record of share transactions and shareholders for approved Stock Exchange listed companies, reducing the amount of paperwork and speeding up the process. 8.3.3 Derivatives
• Derivative – a security which is based upon, or derived from, another security. • Options – an agreement between two parties where one party gives the other the right, but not the obligation, to buy or sell an instrument, such as a particular share, under certain conditions. • Futures – a future contract is a standardized agreement to buy or sell a specific commodity or security at a specific time and place in the future, at a price established through open outcry in a central, regulated marketplace. Option
• Kinds of Periods – American Option: some time in the future
– European Option: some day in the future • Specification – buyer, seller, price, quantity, term • Category – Call Option • it gives the holder the right to call for, or buy, a certain number of shares at a predetermined price. • bull: someone expects share prices to rise – Put Option • it gives the holder the right to sell a specified number of shares at a predetermined price. • bear: someone expects share prices to bear – Stag • someone who buys a new issue of shares with the intention of selling as soon as shares come onto the market. (Premium) Future
• Function – avoid market risk (transfer price risk)
– find the reasonable price • Hedge the value – buy/sell the goods on the spot market, at the same time, sell/buy the same amount similar ones on the future market.
– when the price is fluctuant, loss on one market can be compensated by the profit on another market. Hedge the Value
Hedge the Value
Time Performance Spot Market 2004.1 Preselling beans: 10000 tons
Buying beans future: 10000 tons
Selling beans ￥ 2800/ton 2004.5 Future Market ￥ 2850/ton
￥ 3200/ton Selling beans future: ￥ 3250/ton
￥ 400 ￥ 400 Future Gambling
Buying beans future: 100 Z (1Z=10 tons)
Selling beans future: Buying
￥ 2700/ton (26902440)*100*10= ￥ 250000 Commissio ￥ 30/Z
Profit ratio Selling (2500003000)/160000 *100=154% ￥ 2690/ton
2690/ton 8.4 MARKET INFORMATION
8.4 MARKET INFORMATION
• Market Index – a weighted average of the prices of the shares which the index is based.
– a measure of the general direction of the market. • Market Capitalization Weighted – the number of shares issued by a particular company enter into the calculation. • Information
–… 8.5 WHO OWNS SHARES?
8.5 WHO OWNS SHARES?
• a board of directors – run the concern on behalf of the shareholders as the government of the company • managing director / chief executive officer – assume responsibility for the daily operation of the firm • executive directors: senior managers
• outside directors – with no daytoday involvement
– elected to bring an independent perspective to the business Challenging the traditional legal view
Challenging the traditional legal view • boards of directors in large companies are elected by only a small percentage of shareholders.
• Reason – most shareholders hold only a tiny interest in the firm
– they can sell their shares on the stock exchange if they did not like what’s happening. 8.6 MARKET EFFICIENCY
8.6 MARKET EFFICIENCY
• efficientmarket hypothesis – share prices fully reflect all information which is relevant to the determination of prices. • relevant information:
– information on past prices as technical analysts
publicly available information published in company reports
other information only to privileged insiders –
– weak form efficiency
semistrong form efficiency
strong form efficiency • 3 degrees ...
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- Summer '11