Stock Markets

Content

Overview of equity securities

How securities are traded
Pricing of company shares
Market price of company shares

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 the
companys board of directors and must be approved by
the shareholders
Residual claim & limited liability
3

 Classi/ied Company shares

According to
the interests of
shareholders

Common stocks
also known as
equity securities or
equities, or ordinary
shares, represent
ownership shares in
a corporation

Preferred stocks
has features similar
to both equity and
debt

Common stocks
Claim on income:
have right to the companys residual income (net profit) after debt
holders and preference shareholders have been paid
Claim on assets:
Have a residual claim on the companys assets in the case of its
liquidation
Voting rights
Elect the companys board of the directors
Vote on resolutions at company general meetings
Approve any change on the constitution and the renounceable rules of
the company

Pre-emptive rights
Avoiding dilution effect
5

Type value of common stock

Face
value

Intrinsic
value

Common
stock

Market
value

Book
value

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

Preferred stocks
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 firms net earnings
Rank ahead of ordinary shares with respect to
dividend payments and claims on assets in
the event of liquidation

Forms of preference shares

Cumulative or non-cumulative
Usually cumulative
Redeemable or non-redeemable
Usually non-redeemable
Participating or non-participating
Usually non-participating

Preference shares
Advantages
No default risk with nonpayment of dividends
Dividends limited
No ownership dilution
Possible tax relief with
franked dividends
Leverage effect on EPS

Disadvantages
Preference dividends are
not tax deductible no
tax relief for firms in
categories 2 and 3
While failing to pay
dividends cannot force a
company into
liquidation, it conveys a
negative signal to the
market

Non-debt sources of long-term capital

Equity financing
Preference shares

???

Bond versus Stock

Bonds

Stocks

Bond owners are creditors

Stockholders are owners of the

company

Creditors generally do 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)

Understanding Share Price Data

2009
Telecommunications Price
Cable and Wireless

142

Change
-0.50

High Low
170 125.1

Yield

P/E Vol.000s

6.2

(1) Name of the firm

(2) Latest price (in pence). In newspapers, this is previous days price
(3) Price change from the previous days 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

22

21,246

Coca Cola Stock

Stock market index

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
Private oering
Public oering

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 they
vary according to jurisdiction.

Article 10 - Decree 58/2012

IPO-Initial Public Offerings

Secondary Offerings

Stock Conditions
Article 12 Securities law
Article 7- Securities law amended

Capital

Performances

Others

Charter capital 10 billion VN

Its business opera7on in the year preceding the year of oering
registra7on is protable and, at the same 7me, it has no accrued
loss up to the year of oering registra7on;
Its issuance plan and plan on the use of capital generated from the
sale oering are adopted by the Shareholders' General Assembly.

Stock Procedures
Article 14.- A dossier of registration of public offering of stocks
comprises:
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 adopting
the issuance plan and the plan on use of capital generated from
the public offering of stocks;
e/ An issuance underwriting commitment (if any).

Prospectus
a/ Brief informa7on on the issuing organiza7on, including its
organiza7onal apparatus, business opera7on, assets, nancial status,
Board of Directors or Council of Members or owner, director or
general director, deputy director or deputy general director and
structure of shareholders (if any);

b/ Informa7on on the oering and securi7es to be oered, including
oering condi7ons, risks, tenta7ve plan on prots and dividends of the
year following the issuance of securi7es, the issuance plan and the
plan on the use of proceeds from the oering;

c/ The issuing organiza7on's nancial statements for the last two years
as specied in Ar7cle 16 of this Law;

d/ Other informa7on specied in the model prospectus.

How company shares are traded

Where securities are traded
(Secondary market)
National and local securities
exchanges
Over-the counter market

Trading on exchange

Sellers of
exis+ng
shares

Brokers

Stock
Exchange/
OTC

-Individuals
-Institutions
-Rest of world

Brokers

Buyers of
exis+ng
shares

-Individuals
-Institutions
-Rest of world

23

NYSE Financial Heaven

1.366 seats
1 seat= 3 million USD
Daily: 1,46 billion stocks traded
with 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
Agreement

OTC

Quotation

Market
makers
25

(1) Agreement transaction

Buyers

!
Agreement!

Buyers brokerage firm!

Confirm the
execution

Confirm the
transaction

Sellers

Sellers brokerage firm!

Receive
orders

Confirm the
execution

Transaction system!

Settlement system!

26

(2) Quoted transaction

Investor
A

Buying order
Inform the
execution

Brokerage
firm A

Buying order
Inform the
execution

Confirm
the
transaction

Transaction
system
Inform the
results

Investor
B

selling order

Brokerage
firm B
Inform the
execution

selling order
27

(3) Market maker transaction

Market
maker A
orders

Confirm the
transaction
Report the
execution

orders

Investor A
Inform the
result

quotation

Brokerage firm
A

confirmation

Market
maker B
quotation

OTC
central
system
quotation

Market
maker C

28

Pricing of Company Shares

Fundamental analysis: The explanation of an assets
value by reference to its potential earnings and risk
Technical analysis: The explanation of an assets value
by the study of past price movements

Fundamental Analysis
Fundamental theory of valuation:
The value today of any financial
asset equals the present value of
all of its future cash flows, suitably
discounted.
Suitably discounted: Take into
account both general level of
interest rates and risk

Fundamental Analysis
Cash flows You buy a stock at price P0 and
plan to sell it in 1 year. You predict that you
can sell it for price P1 and receive a dividend
of D1 at the end of the year. Discount future
cash flows P1 and D1 to calculate current
stock value (price):

D1 + P1
P0 =
1+ K
K: Discount rate

Fundamental Analysis
Cash flows If the investor plans to hold the
stock for H periods, receive a series of
dividend D1, D2, DH and sell it after H
periods for price PH.

D1
D2
DH + PH
P0 =
+
+
....
+
2
H
1 + K (1 + K )
(1 + K )

Fundamental Analysis
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 end
of three years you anticipate selling your
stock at a market price of $94.48. What is
the price of the stock given a 12% expected
return?

Fundamental Analysis
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 end of three years you anticipate selling your stock at a
market price of $94.48. What is the price of the stock given a
12% expected return?

3.00
3.24
3.50 + 94.48
PV =
+
+
1
2
3
(1+.12 ) (1+.12 )
(1+.12 )
PV = $75.00

Fundamental Analysis
Cash flows If the investor plans to hold the
stock forever, he will receive a series of
dividend D1, D2, D3..=> Discounted
Dividend Model (DDM)

D3
D1
D2
P0 =
+
+
+
....
2
3
1 + K (1 + K ) (1 + K )

Fundamental Analysis
If we forecast no growth of dividends (D1 =
D2 = D3 = ), and plan to hold out stock
indefinitely, we will then value the stock as a
PERPETUITY.

D1 EPS
Perpetuity = P0 =
=
K
K
Assume all earnings are
paid to shareholders

Fundamental Analysis
Cooper, Inc. common stock currently pays a $1.00
dividend, which is expected to remain constant forever. If
the required return on Cooper stock is 10%, what should
the stock sell for today? Given no change in the
variables, what will the stock be worth in one year?

Fundamental Analysis
P0 = $1/0.10 = $10
One year from now, the value of the stock,
P1, must be equal to the present value of all
remaining 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 a
constant discount rate), the price of a nogrowth stock will never change.

Fundamental Analysis
Constant Growth DDM - A version of the dividend
growth model in which dividends grow at a
constant rate forever (Gordon Growth Model).

D1
P0 =
Kg
g: constant growth rate of dividends
Given any combination of variables in the
equation, you can solve for the unknown variable

Fundamental Analysis
We can use Gordon growth model to get the stock price at
any point in time

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

Fundamental Analysis
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 5
years?

Fundamental Analysis
D1
$3.00
P0 =
=
= $75.00
K g .12 .08
5

D6 = D1.(1 + g ) = 3x(1 + 0.08) = 4.408

D6
$4.408
P5 =
=
= $110.2
K g .12 .08
P5 = P0.(1+g)5 = 75 x 1.085 = 110.2

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

Valuing Common Stocks

P0

D1/(K - g)
=

$5 ( 1.05 )/( 0.09 - 0.05 )

$5.25/.04

$131.25 per share

Fundamental Analysis
Example- continued
If the same stock is selling for $100 in the
stock market, what might the market be
assuming about the growth in dividends?

$3.00
$100 =
.12 g
g =.09

Answer
The market is
assuming the dividend
will grow at 9% per
year, indefinitely.

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

Fundamental Analysis
P0

D1/(K - g)

(K - g)

D1/P0

D1/P0 + g

$5.25/$65.625 + .05

0.13 = 13%

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

D3
P3
D1
D2
P0 =
+
+
+
2
3
3
1 + K (1 + K ) (1 + K ) (1 + K )
1
2
2.5
52.5
=
+
+
+
= 43.88
2
3
3
1 + 0.1 (1 + 0.1) (1 + 0.1) (1 + 0.1)

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

Dt + Pt
D1
D2
P0 =
+
+ .... +
2
1 + K (1 + K )
(1 + K )t
Dt +1
Pt =
Kg

Fundamental Analysis
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 risk
and general level of interest rates

Events that influence the factors will cause share price to

change

Capital Asset Pricing Model

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

Capital Asset Pricing Model

Ex: Thornbury has a beta coefficient of 0.9. The risk free
rate of interest rate is 3% while the return on the whole
market portfolio is 14%. What is required rate of return on
Thornburys stock? What is the price of Thornburys
share if its last dividend is 6p per share and earnings
have been growing steadily at 10% pa?

Capital Asset Pricing Model

KT = 0.03 + 0.9 (0.14 0.03) = 0.129

0.06(1.1)
PT =
= 2.28
0.129 0.1

Fundamental analysis

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 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

years 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

Technical Analysis
Technical analysis (chartism): The explanation of an
assets value by the study of past price movements and
trading volumes
Visual study of recent patterns in the behavior of a
shares price

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 for
a 10-day sample of closing price is the mean of the
previous 10 days' closing prices. If those prices are
pM, 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 unnecessary
for this simple case,

Technical Analysis
Price

P2

P1

t0

Time

Technical Analysis
Support level P1: The price range at which the
technician would expect a substantial increase in the
demand and price of the stock. In other words, stock
price 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 capital
growth

Technical Analysis
Resistance level P2: The price range at which the
technician would expect an increase in the supply of the
stock 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