Transcript Chapter 1
Colegio Mayor de Nuestra Señora del Rosario International Finance Professor: Alejandro José Useche Arévalo Monitor: Daniela McAllister Harker May 2013 © This Power Point presentation is an academic tool, intelectual property is owned by its author, Alejandro José Useche Arévalo. It has been prepared as study guide for the International Finance class at Universidad del Rosario’s Economics Faculty. Data was taken from Bllomberg ® Financial System, with academic purpose only. Any reproduction is forbidden. International Stock Market 3 Purpose of the Stock Market Almost every large corporation started out as a small, momand-pop operation and through growth, became financial giants. Wal-Mart was originally a singlestore business in Arkansas; Dell computer began with Michael Dell selling computers out of his college room; McDonald’s was once a small restaurant no one had heard of... 4 What is a stock market? A stock market or equity market is a public market for the trading of securities listed on a stock exchange, at an agreed price. A stock exchange is an entity which provides trading facilities for stock brokers and traders to trade stocks and other securities. To be able to trade a security on a certain stock exchange, it has to be listed there. Modern markets are electronic networks, which gives them advantages of speed and cost of transactions. Trade on an exchange is by members only. 5 HISTORY In France, during the 12th century, the courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. As these men also traded in debts, they could be called the first brokers. In the late 13th century commodity traders in Bruges gathered inside the house of a man called Van der Bourse, and in 1309 they institutionalized this until now informal meeting and became the "Bruges Bourse". The idea spread quickly around Flanders and neighbouring counties and "Bourses" soon opened in Ghent and Amsterdam. 6 HISTORY In the middle of the 13th century Venetian bankers began to trade in government securities, followed by people in Pisa, Verona and Florence. The Dutch later started joint stock companies, which let shareholders invest in business ventures and get a share of their profits - or losses. In 1602, the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds. 7 HISTORY Generally the origin of the stock exchange is traced back to the stock exchange in Antwerp (1460). Still the Amsterdam Stock Exchange is considered as the oldest. The New York Stock Exchange traces its origins to 1792, when 24 New York City stockbrokers and merchants signed the Buttonwood Agreement. This agreement set in motion the NYSE’s commitment to investors and issuers. 8 HISTORY Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. Tempted by false promises and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information. When the stock market crashed in October 1929, public confidence in the markets plummeted. Securities Act of 1933 & Securities Exchange Act of 1934: created the Securities and Exchange Commission (SEC), to restore investor confidence in capital markets by providing more reliable information and clear rules of honest dealing. President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy's father, to serve as the first Chairman of the SEC. 9 Stocks A stock is a certificate that represents ownership of a certain portion of a firm. When a firm issues new shares, it does not add to its debt. Instead, it brings in additional “owners” who supply it with funds. Unlike bonds or direct borrowing, stocks do not promise a fixed annual payment. Returns depend on company performance: if profits are high, the firm may pay dividends. 10 Dematerialization - DEMAT It is the move from physical certificates to electronic book keeping. Actual stock certificates are being removed and retired from circulation in exchange for electronic recording. This system works through a depository: it is a system of organisation, which keeps electronic records of securities. USA: Depository Trust Company. European Union: European Central Securities Depositories Association (ECSDA). Japan: Japan Securities Depository Center, Inc. (JASDEC) . Colombia: Deceval, DCV. 11 Different Types Of Stocks 1. Common Stock: they represent ownership in a company and a claim (dividends) on a portion of profits. They give voting rights: investors get one vote per share to elect the board members. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Higher risk, but also higher return. 2. Preferred Stock: they represent some degree of ownership in a company but usually do not imply voting rights. They usually guarantee a fixed dividend. In the event of liquidation, preferred shareholders are paid off before the common shareholder. Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason. 12 Different Types Of Stocks Blue chip stocks are stocks of well-established companies that have stable earnings and no extensive liabilities. They have a track record of paying regular dividends, and are valued by investors seeking relative safety and stability. Penny stocks are low-priced, speculative and risky securities which are traded over-the-counter (OTC). Income stocks offer a higher dividend in relation to their market price. They are especially attractive to investors who are looking for current income that will gradually grow over the years as a way to offset inflation. Growth stocks are securities which appreciate in value and yield a high return. Their profits are typically re-invested to expand the business. Investors gain because the stock prices increase as the business grows, thus increasing the value of the investment. Value stocks are securities which investors consider to be undervalued. They feel that the stock is being traded below market value, and they believe in the long-term growth of the issuing company. 13 Some important terms IPO: Short for Initial Public Offering. An IPO is when a company sells stock in itself for the first time. Going Public: Slang for when a company is planning an IPO. Underwriter: The financial institution or investment bank that is doing all of the paperwork and orchestrating a company's IPO. Ticker Symbol: A short group of letters that represents a particular stock. KO = Coca Cola, MSFT = Microsoft, BCOLO = Bancolombia. 14 Some important terms Dividends: Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Earnings per Share: amount of profit to which each share is entitled. A capital gain is an increase in the value of an asset. A realized capital gain occurs when the owner of an asset actually sells it for more than he paid for it. 15 Some important terms Market Capitalization: The amount of money you would have to pay if you bought every share of stock in a company. (To calculate market cap, multiply the number of shares by the price per share). Turnover: total of volume of trade done on an exchange during the year, divided by the exchange’s total market capitalization. Cross-holding of shares: practice of one firm owning shares in another firm; double-counting must be avoided. 16 World Market Capitalization Stock Market Size Developed markets Emerging markets Frontier markets 19 Type of Markets 1. 2. Exchanges physical location for trading trading by members who own a “seat” on the exchange stock traded on exchange are listed stocks OTC trading electronic network of dealers all over the world more than one dealer per stock, not obligated to make a market unlisted stocks & listed stocks 3. Direct trading 20 Trading systems 1. Price-driven: it uses “open outcry” system (auction) 2. Order-driven: it uses an electronic system 3. Hybrid: it uses both 21 Open Outcry Hand Signals: The NYMEX Code BUY STOP OUT/CANCEL SELL PUT CALL 22 To indicate quantity (number of contracts bid or offered), touch your face: Quantities one through nine: touch your chin. Quantities in multiples of 10: touch the forehead. Quantities in multiples of 100: make a fist and touch the forehead. 23 24 Hand Signals: Months 25 Some types of orders Orders: instructions from investors to brokers. Market order: buy/sell order to be executed at best price: get lowest price for buy order, get highest price for sell order. Market orders have priority in trading. They have no guarantee of execution price. Limit order: buy/sell order where investor specifies price range: “buy at $50 or less”, “sell at $52 or more”. investor sets reservation price, but there is no guarantee that limit order will be executed. Stop order: order turns into market order when certain price (“the stop”) is reached: “buy if price rises to $60”, “sell if price falls to $58” (stop loss order). 26 Order size 1. Round lots: lots of 100 shares. 2. Odd lots: less than 100 shares (more difficult to trade). 3. Block trades: 10,000 shares or $200,000 value. 27 International cross-listing and depositary receipts Many companies are finding ways to broaden their investor bases and raise capital by cross-listing their shares on foreign exchanges. There are two main requirements in order to make a cross-listing: 1. Companies must comply with the standars set for cross-listing by the exchanges. 2. Companies must adhere to the securities regulations of the country in which it wants to list its shares. 28 International cross-listing and depositary receipts Cross-listed stocks can be traded directly on a national stock market, but most often they are traded in the form of a depositary receipt. Depositary receipt (DR): is a type of negotiable financial security that is traded on a local stock exchange but represents a security, usually in the form of equity, that is issued by a foreign publicly listed company. 29 American Depositary Receipt (ADR) It represents ownership in the shares of a non-U.S. company that trades in U.S. financial markets. ADRs enable U.S. investors to buy shares in foreign companies without the hazards or inconveniences of cross-border & cross-currency transactions. ADRs carry prices in US dollars, pay dividends in US dollars, and can be traded like the shares of US-based companies. Each ADR is issued by a U.S. depositary bank and can represent a fraction of a share, a single share, or multiple shares of the foreign stock. ADR owner has the right to obtain the foreign stock it represents, but US investors usually find it more convenient simply to own the ADR. 30 American Depositary Receipt (ADR) The price of an ADR often tracks the price of the foreign stock in its home market, adjusted for the ratio of ADRs to foreign company shares. ADRs do not eliminate the currency and economic risks for the underlying shares in another country. For example, dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with the deposit agreement. The first ADR was introduced by J.P. Morgan in 1927, for the British retailer Selfridges&Co. There are currently four major commercial banks that provide depositary bank services - JPMorgan, Citibank, Deutsche Bank and the Bank of New York Mellon. ADRs are listed on either the NYSE, AMEX or Nasdaq. 31 Global Depositary Receipt - GDR A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A GDR is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. Global Depository Receipts facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. Prices of GDRs are often close to values of related shares, but they are traded and settled independently of the underlying share. 32 Major world indexes AMERICAS Argentina Brasil Canada Colombia Chile Mexico USA MerVal Bovespa S&P TSX IGBC IPSA IPC Dow Jones S&P 500 NASDAQ AFRICA Egypt Israel CMA TA 100 AUSTRALIA Australia All Ordinaries EUROPE Germany Spain France Italy UK Russia Switzerland DAX Madrid General CAC 40 S&P MIB FTSE 100 Moscow Times Swiss Market ASIA South Korea China Hong Kong India Indonesia Japan Pakistan Singapur Seoul Composite SSE (Shanghai) Hang Seng BSE 30 Jakarta Composite Nikkei 225 Karachi 100 Straits Times 33 What is a stock market index? Index based on a statistical compilation of the share prices of a number of representative stocks (bluechips). 1. Understand what the index covers: type and amount of stocks. 2. Understand the numbers: they are index numbers, calculated as weighted averages, so they must be compared to their previous values. 3. Read the change in the market index as a percentage not a dollar amount: calculate its percentage variation. 4. Compare market index numbers to other times for relevant comparison: market performance, bull or bear. 34 Dow Jones Industrial Average, USA 36 37 NASDAQ The NASDAQ Stock Market, is an US based stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations," but the exchange's official stance is that the acronym is obsolete. It is the largest electronic screenbased equity securities trading market in USA. With approximately 3,700 companies and corporations, it has more trading volume than any other stock exchange in the world. 38 39 FTSE 100 - London, UK NIKKEI 225- Tokyo, Japan BOVESPA - Sao Paulo, Brazil IGBC - Colombia 44 45 Main Indexes Correlation IGBC & COP Dow Jones Index & USD/EUR Stocks: Different values Nominal value: The value of a share when issued. Book value: A company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. This is how much the company would have left over in assets if it went out of business immediately. Market value: The current quoted price at which investors buy or sell a share of common stock or a bond at a given time. Also known as "market price". Investment (intrinsic) value: the value of the corporation based on discounted cash flow analysis and the income generating capacity of the firm. Graham (1973): market value is what investors pay, intrinsic value is what they get. 49 Stock Valuation: Determining the Price of a Stock Things that are likely to affect the price of a stock include: What people expect its future dividends will be When the dividends are expected to be paid The amount of risk involved The price of a stock should equal the discounted value of its expected future dividends, where the discount factors depend on the interest rate and risk. Announcements of higher expected future dividends or perceived lower risk should increase the firm’s stock price. 50 Stock Valuation Gordon-Shapiro Dividend Valuation Model A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. Where: D = Expected dividend per share one year from now k = Required rate of return for equity investor G = Growth rate in dividends (in perpetuity) 51 D D(1 + g) D(1 + g) 2 V0 = + + +... 2 3 (1 + r) (1 + r) (1 + r) D1 D1 D 1 (1 g ) (1 + r) V0 = + + + ... 2 (1 + g) (1 + g) (1 + r) (1 + r) D1 (1 + r) V0 - V0 = (1 + g) (1 + g) D1 V0 = (k - g) 52 Stock Valuation The price of a stock may also be driven up not by the discounted value of expected future dividends, but by people’s views of what others will pay for the stock in the future. One might call this a bubble because the stock price depends on what people expect that other people expect, etc. "Irrational exuberance" is a phrase used by the former Federal Reserve Board Chairman, Alan Greenspan, in a speech given at the American Enterprise Institute during the stock market boom of the 1990s. The phrase was a warning that the market might be somewhat overvalued. 53 Business cycle: investors feelings 54 Rational valuation? Fair price?