SHARE TRADING

Price Determination
Financial Analyst

SUMMARY
Ordinary Share Rights/Benefits of Shareholders Investment Process Price vs. Intrinsic Value Price vs. Company Performance Options for Management Conclusion

Ordinary Share
An ordinary share is a unit of ownership Ordinary shares (common stocks) represent the proportionate ownership of a business enterprise The ownership is divided in shares and the proportion of any particular shareholdings will be the number of shares held An equity security is a security providing an ownership interest in a company
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Rights/Benefits of a Shareholder
Right to attend the Annual General Meeting (AGM) of shareholders Right to vote at AGM to elect directors, appoint officers, decide on dividends and appoint auditors Right to a proportional share of profits distributed as dividend

Rights/Benefits
Right to a proportional share in net assets on liquidation Right to receive regular financial information on the progress of the company Right to first subscribe for any new shares when the company comes to the market to raise new equity capital
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Rights/Benefits
Benefits accruing from potential for price appreciation Using shares as collateral for a loan Investment option for long-term Best hedge for inflation (Inflation an invisible thief stealing away your hard earned savings around the clock!!)
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Rights/Benefits - Inflation
Why does a share potentially protect an Investor from Inflation? Because the assets of the company will be rising in value every year - hopefully in line with inflation Because the earnings of the company will be rising in value every year - hopefully in line with inflation The above factors should be reflected in a rising share price

Rights/Benefits - Inflation
However, if the company allows its assets to deteriorate or does not grow its earnings its share price will fall.

Other things constant investors will benefit from:

Rising asset values Rising earnings
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Investment Process
Broker or Investment Advisor There is no fixed formula for finding a broker or adviser Choose the one you feel good with him or her (it is a matter of chemistry!!) Ask for recommendations Or just march into brokerage house and ask what they can do for you.
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Investment Process
Licensed stockbroker/adviser will: Open a brokerage and Central Depository System account (CDS) Discuss with you securities suitable for your investment objectives Transact on your behalf on the Exchange (trading platform) ...at what price? ...whether it is a buy or sell?
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Price vs. Intrinsic Value

(Nominal Value, Market Price/Value, Book Value and Intrinsic Value) What determines share price?? Demand and supply forces Liquidity situation in the economy or market Information with news contents Speculative motive
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Price vs. Intrinsic Value

what determines share price?? Comparable market variables - Price-to-earnings ratio - Price-to-book ratio These ratios are commonly used to decide whether the share price is under, or overvalued.
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Price vs. Intrinsic Value

What determines value? (Other names: Fundamental or underlying or fair value) Company performance Competitive position and its sustainability Growth rate and return on invested capital - Rapid growth rates in assets earning rate of return equal to or greater than cost of funds = creates value, otherwise value will 14 be destroyed.

Price vs. Intrinsic Value

Deriving Intrinsic value Definition: Intrinsic value of any investment is the present value of its anticipated, future cash flows discounted at an appropriate discount rate. Anticipated future cash flows: depend on the companys performance in generating revenues and controlling costs so as to grow the bottom-line: profit to ordinary 15 shareholders

Price vs. Intrinsic Value

Deriving Intrinsic value Appropriate discount rate: depends on the companys cost of funds (capital), i.e. the rate of return required by the providers of capital to the company. It reflects how the company is rated in terms of riskiness. The higher the cost of funds the lower the companys value, ceteris paribus!
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Price vs. Intrinsic Value

How to calculate Intrinsic value?

PV = CF1/(1+d) + CF2/(1+d)2 + ..CFn/(1+d)n

PV = Present value (Intrinsic value) CF = Anticipated cash flow d = discount rate (cost of funds) In a perfect world the PV above should equal the market share price
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Price vs. Company Performance

Does Company Performance affect price Directly: No Indirectly: Maybe yes: companys splendid performance may feed into demand, just as poor performance may result into weak demand and possibly more supply.

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Price vs. Company Performance

Extended disparity between share price and company performance may result from the following: - Market inefficiency - Market sentiments - Composition of shareholders (Investors and speculators) - Non-market factors
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Investors/Shareholders??
It doesnt matter for long-term investors as long as company fundamentals are solid, and investment objectives haven't changed Focused approach to investment will weather any short-term market euphoria Close follow-up on company affairs, with the professional help of an advisor
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Options for Management

What can the management do if market do not mirror performance?? Continue to focus on strategic goals and value enhancements Develop the language to communicate with shareholders Road show to drum up the performance. Buy back shares: price might increase because of less shares in circulation

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Conclusion
A stock is not just a ticker symbol or an electronic blip, it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.

.Benjamin Graham
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Conclusion
The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustifiable pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists. .Benjamin Graham
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