Chapter 8
The Stock Market
Information:
Evolution of the Stock Market
Origin
– 17th century
– London
– Coffee houses
– Purpose
To form joint-stock companies to undertake risky trading
ventures.
Stock Exchanges and Future Markets
Board to Boardless Stock Exchange
24-hour world stock market
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
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 long-term debt (borrowing) and equity
(ordinary share capital) issued by both business and government.
8.3 HOW THE ASX WORKS
8.3.1 Trading
Stockbroking firm
– instruction of which shares,numbers,price
Past
– face-to-face 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”
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
Time Performance Spot Market Future Market
2004.1 Preselling beans,
10000 tons
￥ 2800/ton
Buying beans future,
10000 tons
￥ 2850/ton
2004.5 Selling beans ￥ 3200/ton
Selling beans future,￥ 3250/ton
- ￥ 400 ￥ 400
Future Gambling
Time Performance Buying Selling
2004.5
(2004.9)
Buying beans future,
100 Z (1Z=10 tons)
￥ 2440/ton
2004.7 Selling beans future,￥ 2700/ton ￥ 2690/ton
Profit (2690-2440)*100*10=￥ 250000
Commission ￥ 30/Z
Margin ￥ 1600/Z
Profit ratio (250000-3000)/160000 *100=154%
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?
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 day-to-day involvement
– elected to bring an independent perspective to the
business
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
efficient-market 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
3 degrees
– weak form efficiency
– semi-strong form efficiency
– strong form efficiency
The Stock Market
Information:
Evolution of the Stock Market
Origin
– 17th century
– London
– Coffee houses
– Purpose
To form joint-stock companies to undertake risky trading
ventures.
Stock Exchanges and Future Markets
Board to Boardless Stock Exchange
24-hour world stock market
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
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 long-term debt (borrowing) and equity
(ordinary share capital) issued by both business and government.
8.3 HOW THE ASX WORKS
8.3.1 Trading
Stockbroking firm
– instruction of which shares,numbers,price
Past
– face-to-face 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”
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
Time Performance Spot Market Future Market
2004.1 Preselling beans,
10000 tons
￥ 2800/ton
Buying beans future,
10000 tons
￥ 2850/ton
2004.5 Selling beans ￥ 3200/ton
Selling beans future,￥ 3250/ton
- ￥ 400 ￥ 400
Future Gambling
Time Performance Buying Selling
2004.5
(2004.9)
Buying beans future,
100 Z (1Z=10 tons)
￥ 2440/ton
2004.7 Selling beans future,￥ 2700/ton ￥ 2690/ton
Profit (2690-2440)*100*10=￥ 250000
Commission ￥ 30/Z
Margin ￥ 1600/Z
Profit ratio (250000-3000)/160000 *100=154%
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?
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 day-to-day involvement
– elected to bring an independent perspective to the
business
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
efficient-market 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
3 degrees
– weak form efficiency
– semi-strong form efficiency
– strong form efficiency
